TTEC Holdings Inc (TTEC) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to the TeleTech third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] This call is being recorded at the request of TeleTech. I would now like to turn the conference over to Karen Green, thank you, ma'am, you may begin.

Thank you, and good afternoon. My name is Karen Green, I am the Vice President of Investor Relations and Treasurer. TeleTech is hosting this call to discuss its results for the third quarter ended September 30th.

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 John Troka, our Interim 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 related to future plans and developments, financial goals and operating performance, and are based on management's current beliefs and expectations.

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 2007 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 restructuring charges. Please refer to the financial tables in both the press release and Form 10-Q for the third quarter where we provide a reconciliation of non-GAAP financial measures.

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

Thank you, Karen, and good afternoon.

I would like to begin by reviewing our third-quarter financial results, after which I will provide a brief business update.

We reported a record third quarter revenues of $304 million, up 11% from a year-ago period. This is the fourth consecutive quarter of double-digit revenue gains resulting from high levels of new, renewed and expanded client relationships. Revenue in North America and International BPO segments grew 17% from the year-ago period and was 98% of our consolidated revenue.

We're expecting a strong fourth quarter from a revenue and margin perspective and are on track to deliver 11% to 12% revenue growth for 2006. New business wins and expansion of existing client relationships continue to accelerate. In the third quarter alone, we deferred $4 million of gross revenue related, primarily, to the accounting for up-front training fees. In addition, we have more than 3,700 employees moving from training into production during the fourth quarter to support the increased business.

Our markets in Canada, the Philippines, India, and Latin America that serve U.S. and European clients are growing 40% year over year. They represent approximately 40% of consolidated revenues and are expected to have an annualized revenue run rate of over $500 million by year end. We believe this makes us one of the fastest-growing global BPO companies in the $1 billion revenue range.

I am pleased to say that our profitability continues to improve. As we continue our double-digit revenue gains, we reached our 6% to 7% operating margin goal in the third quarter, one quarter ahead of schedule, and are now increasing our fourth quarter 2006 operating margin expectations to 7% to 8%.

Third quarter earnings per share more than doubled to $0.18 from $0.08 in the year-ago quarter, excluding the third quarter 2005 next tax benefit. The continuing improvement in our financial performance is a direct result of our ability to address the expanding BPO needs of our global client base.

Our unique centralized delivery platform, standardized operating practices, and growing and diversified product suite have enabled TeleTech to deliver strong organic growth while significantly improving profitability. In addition, market dynamics continue to shift in our favor. Recent studies show that companies with high customer satisfaction levels enjoy premium pricing in their industry, which results in improved profitability and greater shareholder returns.

Given the strong correlation between customer satisfaction and improved profitability, more and more companies are increasingly focused on strategic capabilities and the total value delivered versus price. At the same time, companies' BPO requirements are becoming more sophisticated, driving them to consolidate providers to those who can deliver a broad spectrum of customer management and BPO solutions. Importantly, they are increasingly seeking partners who have a proven track record of operational excellence and are committed to investing in innovative new tools that can further integrate their front and back office needs.

One example of the extensive front and back office work we perform with one of the world's largest airlines. We started this work just a few months ago and it involves flight attendant scheduling and expense report auditing to validate adherence with vendor contracts. This is complex work that requires nine weeks of training before employees are moved into production. These favorable market dynamics play into our strengths and continue to position TeleTech as the premium global BPO provider.

We believe very few companies can deliver the caliber of solutions we offer due to our global scale, our centralized delivery platform, standardized operating practices, solid financial position, and our 24 years' experience in pioneering the industry. All of these factors are driving client renewals and expansions to an all-time high. And we continue to win new client relationships. Our double-digit growth during 2006 is coming from two primary areas.

Two-thirds of our growth is coming from our embedded client base. Given our strong account management and operational execution, our clients are giving us additional BPO business as they consolidate providers and outsource more of their internal work. In addition, they see tremendous opportunities to drive greater operational efficiencies by integrating their front and back office needs through outsourcing.

The remaining growth is coming from key client wins, many of which are in high growth industries that have traditionally not outsourced including healthcare, financial services, and retail. Today those verticals represent nearly 20% of revenue, up from 10% three years ago, since the beginning of the year.

We have signed eight new clients and expect to add several more before year end. This growth has required us to add a record 7,500 BPO work stations during 2006 in our fastest growing labor arbitrage markets. At the end of third quarter, approximately 5,000 work stations or 70% of these work stations were built with the remainder being completed in the fourth quarter. Importantly, our utilization in these labor arbitrage markets is at a targeted level of 85%. In addition, our worldwide shared center utilization increased sequentially from 71% to 75%.

Let me now review the performance of each business segment starting with North American BPO segments. Revenue grew an impressive 21% to $207 million and represented 68% of our consolidated revenue. The operating margin was 12.2%, up from 9.2% in the year-ago quarter. During the fourth quarter, our North American segment is undertaking its largest sequential revenue ramp in our 24-year history. This includes seasonal lift we see from certain companies in the logistics, retail, and healthcare verticals.

Revenue in our International BPO segments increased by 9% to $90 million. This segment was profitable for the first time in four years with an operating income of $200,000. This compares to an operating loss of nearly $2 million in the year-ago quarter. While it is a small profit, it's an important milestone as our goal is to return this segment to increasing levels of profitability in 2007 and beyond. The improved performance is a direct result of the new business wins, repricing or exiting underperforming business, and ongoing cost improvement initiatives.

Newgen's operating results were in line with our previously announced guidance for this segment, and we continue to actively manage Newgen with a goal of improved profitability. As reported last quarter, we closed the acquisition of Direct Alliance on June 30th and are moving smoothly through the integration process. Its financial results were in line with our expectations, and we see tremendous cross-sell opportunities with Direct Alliance. Our combined strength in improving our clients' top-line performance is a key competitive advantage as we grow the combined companies.

We continue to seek strategic acquisitions that complement our core offerings, diversify our revenue, and broaden our vertical industry expertise. As with Direct Alliance, we will approach acquisitions with a strict financial discipline to ensure that they are accretive to our results. As we continue our profitable growth, we're also committed to improving our return on invested capital. Over the last five years, our business has gone through an extensive transformation and during that time we have made significant investments in people, processes, and technology to emerge as a stronger more agile company that is delivering high levels of client satisfaction.

These investments are now paying off with significantly reduced CapEx per revenue producing work station, lower operating expenses, and increased standardization and higher return on invested capital. We define ROIC as earnings before interest and taxes divided by our average shareholders' equity. At the end of September, our last 12 months, ROIC was 17%, up from 11% at the end of 2005. We expect this will increase to over 20% by year end.

Further improvement of our ROIC will come from increased utilization of our work stations during both peak and non-peak hours and from our recently announced work-at-home program. Teletech@Home is an exciting new initiative and a natural extension to our multifaceted global work force that enables onshore, nearshore, offshore, and now at-home capabilities. Importantly, our @Home employees will leverage our proven, highly scalable and centralized technology platform. This enables our @Home employees to access the same proprietary training processes, reporting and quality tools as our worldwide workforce. This gives us improved flexibility in sourcing talented employees on skillset rather than site location.

Industry reports estimates that more than 100,000 work-at-home employees in the United States and this number is expected to grow to more than 300,000 by 2010. We believe TeleTech@Home will be a key contributor to our future growth initiatives and estimate that approximately 15% of our North American workforce will serve our clients' customers from home by the end of 2007.

In conclusion, our strong financial performance and our commitment to increased profitability and ROIC gives us confidence in our ability to achieve our near- and longer-term financial goals. Let me now turn the call over to John Troka, after which I will make a few closing comments.

Thank you, Ken, and good afternoon.

As I approach my fifth anniversary with TeleTech, I am excited to serve as the company's Interim CFO. I have had the opportunity to participate in the business transformation that Ken discussed earlier, and I'm proud of our continued strong financial performance and our four consecutive quarters of double-digit revenue growth. Let me start my review by providing an overview of our third quarter financial results.

As outlined in today's press release and in our Form 10-Q we reported record third quarter revenue of $304 million. This was an 11% increase over the year-ago quarter, which I remind you included $14 million related to the hurricane relief work performed on behalf of the U.S. government. Our earnings per share was $0.18, up 12.5% from $0.16 in the year-ago quarter. If you remove the $0.08 net tax benefit we enjoyed in third quarter last year, our current quarter EPS more than doubled as compared to last year.

Also, this quarter's results included $1.7 million of stock-option expense or nearly $0.02 per share. Our gross margin improved by 110 basis points to 27.4%. Our North American BPO segment, representing 68% of our consolidated revenue, had a gross margin of 29.1%, up from 25.5% in the year-ago quarter.

Several factors contributed to this improvement, including new and expanded business driving increased utilization of our capacity, rapid growth in our offshore locations, improving profitability in select client programs, eliminating unprofitable programs, and lastly our multi-phased cost improvement initiative.

We also continue to see improvement in our SG&A efficiency. Our SG&A as a percent of revenue was 16.2%, lower than the 17% reported in the year-ago period. As I indicated earlier, this quarter's SG&A was higher by $1.7 million, for stock-option expense and, excluding that expense, this quarter's percentage would have been 15.7%.

Our third quarter operating margin was 6.7%, versus 4.3% in the year-ago quarter. As previously disclosed, our goal was to exit the fourth quarter of this year at 6% to 7%, and I'm happy to say we have achieved this milestone one quarter ahead of plan. Our operating margin for North American BPO segment was 12.2%. North American and International BPO segments combined had an operating margin of 8.5%.

As discussed during previous conference calls and in our Form 10-Q, we continue to incur significant training-related expenses as the business continues to grow. This quarter our operating income was lower by $2.4 million or approximately $0.02 per share from these training-related costs.

We are very pleased with the improving results of our International BPO segment. This segment was profitable for the first time in four years. The improved performance stems from strategic actions taken over the past several years to improve our future results. These actions included increasing profitability on new and existing client programs and exiting underperforming international locations. Our net interest expense was $1.7 million this quarter compared to net interest income of $200,000 in the year-ago period. This increase is related to higher borrowings for the acquisition of Direct Alliance and from our ongoing share repurchase program.

Turning to taxes, our effective tax rate for the quarter was 33.5%. While our quarterly effective tax rate will vary, we believe the full-year rate should trend between 30% and 35% excluding certain tax benefits.

Cash and cash equivalents at the end of September were $55 million. At quarter end, we had a debt-to-equity ratio of only 26%. Our DSOs were 67 days compared to 65 days in the second quarter. This is due in part to the acquisition of Direct Alliance as their clients' average payment terms are longer than TeleTech's average. We plan to negotiate these terms down as we renew their client agreements.

Regarding our remaining FEMA receivable, this represents approximately 2 days of DSOs, and we fully expect to collect these monies before year end. As Ken indicated earlier, during the fourth quarter we are underway with the largest sequential revenue ramp in the company's history. As such, capital expenditures were $23 million in the third quarter, up from $11 million a year ago.

We believe 2006 capital expenditures will approximate $65 million of which 70% is growth related, with the balance for maintenance. Our EBITDA for the quarter was $34 million, up 38% from $25 million in the year-ago quarter. Free cash flow was an impressive $26 million for the quarter and up from $7 million in the year-ago period. This increase is primarily attributable to the 71% increase in our operating income and from favorable working capital changes.

During the quarter, we amended and restated our existing revolving credit facility. This agreement is for a five-year period and the size has been increased from $135 million to $180 million. In addition, the agreement has significantly improved pricing and covenant terms.

In conclusion, we're very encouraged by our solid financial performance and by the positive market trends we see for our business. Based on this performance and the strong pipeline of new business, we're on track to meet or exceed our previously announced year-end 2006 and 2007 goals.

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

Thank you, John.

We're pleased to have delivered four consecutive quarters of strong revenue and earnings growth and believe the company has clearly entered a renewed growth and profitability phase. We're at an exciting time in our company's history as our clients are increasingly selecting TeleTech, because we deliver strategic capabilities that drive increased revenue, profitability and high levels of customer satisfaction.

At the same time, our investments in the business over the last five years have given us an exceptionally efficient delivery model. This has enabled us to significantly increase our facilities payback periods and ROIC for our shareholders. These factors are favorable for TeleTech as we capture increased market share and continue our track record of profitable growth.

I remain confident we can meet or exceed 2006 and 2007 goals, which include, growing 2006 revenue by 11% to 12% and ending the year with a 7% to 8% operating margin and an 11% to 12% EBITDA margin. By fourth quarter of 2007, our goal is to reach a revenue run rate of $1.5 billion and an operating and EBITDA margin -- excuse me, of 10% and 15% respectively.

We look forward to updating you on our continued progress in the coming quarters. And with that, we'll open the call up for questions. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Thank you. Our first question comes from Tobey Sommer of SunTrust Robinson Humphrey. You may go ahead, please.

Thanks. Congratulations on a great quarter, Ken, and everyone there. I just wanted to ask a question on utilization. And wondering -- looking forward, where do you see more opportunity, whether it's increasing the work station utilization or perhaps looking at elevating the turns that you're using those for? Thanks.

Thank you, Tobey, this is Ken.

Our goal right now we kind of view that our business naturally has many dials and levers that improve margin, and our goal right now is to really drive what we call "Work station utilization," or internally the slang term is to increase the turn on the actual work station. We're right now at about 1.2 turns or approximately 10 hours per work station across the globe. For every one hour that we add in after hours or off-peak time capacity, it's worth approximately 150 basis points of absolute net operating margin.

So, with that type of leverage, you can imagine that we have a very keen focus on driving the work station utilization up, the individual work station utilization up. We think that this is going to take us time as we continue to sell more non-voice work. And we have a goal internally of approximately 1.6 turns. And we hope to get there over the next approximately, to be conservative, over the next 18-24 months.

As for overall capacity utilization, which, as you can see, is trending up to 75% overall and in our offshore and near-shore labor arbitrage capacity is now at 85%, we have an internal goal of driving that to approximately 85% to 90% and for every 500 basis points that we drive our overall work station capacity utilization, it's worth approximately 70 basis points.

So, naturally, that too is also very important to us, but when you look at where the real golden lever is, it clearly resides on driving the actual turn ratio on a per work station basis. I hope I answered your question.

You did, Ken. One follow-up on that and then I will ask another question and then I'll get back in the queue. When really trying to drive that improvement in work station turns, is there a particular kind of contract that is more effective at increasing that? Are BPO contracts more effective than traditional customer care? That would be my follow up. And then, I would love it if you could just comment a little bit on the opportunities you see before you as a result of the acquisition of Direct Alliance. Thank you.

Good question, Tobey. We get to it multiple ways. One of the ways is is that we follow the sun across the globe. So, for example, as the U.S. or excuse me, as the UK voice business starts to sunset, the U.S. business starts to rise. So you elongate the amount of voice hours that you get by following the sun across different theaters that we're focused on. So, that's one way of driving it.

The second way is driving non-voice business that, in fact, is time sensitive to either a 12-hour or 24-hour period. So that tends to be for us much easier work than the traditional customer management work. That might be work like various different types of application processing. It might be work like some of the work that we're doing in the airline industry, where we are doing expense report management, et cetera. It might be forms of document management work, et cetera.

A good portion of that work does not require contact with a person and therefore while people are sleeping it allows us to get better utilization out of those work stations. So, we're in the process of hiring and bringing on a dedicated executive in the BPO area that's sole focus is just going to be focusing on non-voice work, while we continue to push the other forms of BPO in the customer management area. Hopefully, I answered that question.

You did. Thank you. Any comments on the opportunities before you in Direct Alliance and then I will get back in the queue?

Sorry, I forgot that question. As for Direct Alliance, we're working on numerous cross-sell opportunities with existing customers right now. As well as we're working on expanding existing relationships that Direct Alliance already has, but the primary focus is adding new logos to Direct Alliance and most of those logos would come from our traditional customer set that we have long-term relationships with.

And so, we feel very comfortable with how this acquisition is integrating and are very excited about the sales prospects and the new logos that we hope to be adding in the near future. Thanks, Tobey.

Thank you. Matt McCormack of Friedman, Billings, Ramsey. You may go ahead please.

Hi. Good evening. In terms of the 3700 employees that you had training and are now moving into production in the fourth quarter, could you just kind of give us some more information on how -- what the timing was, like when were they hired during the third quarter? And are they going to come on a third for each month during the fourth quarter? Are they all in production? How should we expect to see that ramp?

Hi, this is Ken, again. I will try to answer your question and if I don't catch it all, I apologize, I have a little chest cold going here, then either John or Karen can join in, but, basically, all of these people were hired in the third quarter time frame and are going through training or completed the majority of their training in third quarter and are all being layered into, for the most part, into fourth quarter.

Okay. Okay. And is there any specific vertical that they are in? Any specific client that is the majority of that, or is it just pretty evenly across the board?

I think it's nicely spread across, but naturally you could assume that the seasonal aspect is coming out of retail, coming out of the logistics, and coming out of healthcare for the Medicare Part D enrollment, but in addition to that, it's also a lot of existing accounts that have made the decision that they want to expand the amount of business overall long-term that they would like to outsource.

Okay. And you did meet your guidance on international being profitable a quarter early. Could you just give a little more information on what was driving that, if there is any specific verticals in Europe, any specific countries what the pricing environment is like, et cetera?

No, I don't think it was any specific verticals. I think it's really just been that we have made it a point that when we focus on something operationally that we're going to work it out and get it turned around.

We told people that for quite some time that the UK was underwater and that we were going to get it to near break even or break even in fourth quarter. We achieved that goal. We told people that we'll make a small profit in first quarter and we believe we'll achieve that goal. So, it's a combination of that taking place, as well as other regions that are taking advantage of the GigaPOP technology, as well as taking advantage of just all the standardization that we have introduced across the board, as well as the combination of all the cost improvement programs. And it's really just all kind of coming together, quite frankly.

Okay. Great. Thank you.

Thank you.

Thank you. Donna Jaegers of Janco Partners. You may go ahead, please.

Hi, Ken, congratulations on a good quarter. On your TeleTech@Home program, you said you wanted, what, a certain -- 15% of your North American workforce by the end of '07. Can you clarify that a little given that we only get to see the breakout for North America that includes Canada and the Philippines, so are we talking a few thousand seats?

Yes, we're talking approximately -- exiting in fourth quarter we're saying that we'll be a couple thousand concurrent users which is the term we'll be using because many at-home companies talk about numbers that are employees that are registered to work, but in fact, are not being paid and therefore it's not a reliable number. So the number that we'll be using that is a reliable number is the number of actual realtime concurrent users.

Great. There seems to be a lot of potential in that portion of the market, just because of the quality of customer care rep you can get, plus, the turnover. Can you talk a little about what the average turnover rate is that you are hoping for in this group, in @Home?

I think it's really too early to give you a number on that, just because I would hate to trip over the number that I put out. We're expecting it to be a lower turnover number, because most of these are people that really don't have another option workwise, because they might be taking care of a parent or taking care of a child or whatever, and this is really their only opportunity for income.

Or they are not taking care of anybody and quite frankly, they are just really looking for some intelligent outside world interaction, so to speak. So, you know, we would expect it to be certainly lower. It's probably going to be certainly well below -- let's just say the 40% range, but I think it's too early for us to predict what that number ultimately is going to be as we really start scaling the multiple programs that we're already live with right now and we're scaling as we speak.

Great. And then just one other question on international now that you have turned the corner there and you guys are a little profitable. How do you envision this ramp in '07? What sort of mark -- can you get it up to sort of mid-single digit margins in '07?

In international you mean? Is that your question?

Yes.

You know what I would rather do, we're really just providing guidance overall, and I would rather at this point not comment on that. We would like to see how the regions continue to keep performing and let's be really candid, we're very pleased with the fact that there was over a $2.2 million turnaround so to speak.

That is the good news. The fact is, is that we don't really consider $200,000 much of a profit, and so we're kind of bouncing at the bottom, and so, the last thing I want to be doing is declaring margins are going to be exponentially growing until we see a few more quarters under our belt.

Okay. Thank you very much.

Thank you. Bob Evans of Craig-Hallum Capital. You may go ahead, please.

Good afternoon and congratulations on a really strong operating margin and getting international profitable. Back on the 3700 seats on the previous question, could you give us a sense of geography in terms of where those seats are coming online?

Bob, this is John Troka. Relative to the geography, a large portion of those 3700 seats are in our labor arbitrage markets both the Philippines and in Latin America. So, for us that obviously is very important because of the profitability that is driven from those particular markets. So we're excited about the growth in those locations.

Is that the biggest driver of your operating margin improvement? It's obviously lower revenue per seat, but higher margin per seat? Is that where the operating margin improvement that you've guided to for Q4? Is that the biggest driver of it?

It's coming from many different areas, it's reduced SG&A, it's just overall cost improvements and you know, the fact that there is a good mix.

Okay. Okay. And is that kind of the same as we go from Q4 '06 to Q4 '07 is that kind of a similar trend to get to that 10% operating margin? It's going to be a combination of continued gross margin improvement and expense leverage?

Exactly, I mean we obviously continue to look at the opportunities we have both on our direct cost side to leverage the facilities and capacities we have in place, as well as that SG&A and again, further leveraging our SG&A cost structure relative to the revenue that we believe we can drive with it. So, it will be on both the direct and the SG&A side that we derive that lift.

Okay. And can you also comment on how much does it cost you today versus how much it maybe cost you three, four years ago to build a center in, say, the 800 to 1,000-seat center? I'm just trying to get a sense of the CapEx required? Because I know the technology that you set up has improved that, but I'm looking for the magnitude.

Yes, Bob, this is John again. What I would tell you relative to that is obviously what we spend on a per seat basis is competitive, but I can tell you that in today's environment we're spending probably 50% less than we were several years ago.

Okay. Really, is the biggest difference there technology or what is making the 50% difference?

It really is the technology and the platform that we have put in place that Ken has talked about relative to our GigaPOPs, and going to a common tool set across the globe.

The other thing that I would add is that our real estate and construction department has really become quite sophisticated where they are now very experienced at building in five, six different theaters simultaneously and have really done a very good job of driving unit costs down, and managing that, along with the global sourcing department.

Because now everything is centralized, we're doing very large buys, whether it be furniture buys, whether it be work station buys, et cetera, and when we can make commitments to vendors of, in some cases, units of 10,000 or more per annum, that obviously allows us to take advantage of our scale.

Okay. And Ken, can you comment -- the growth that you are expecting for Q4 and for next year, how much of that is new customer growth versus existing customer growth? Ballpark?

The growth in the fourth quarter, again what we're look at is probably two-thirds from our embedded base and one-third of that growth would be from new clients.

Okay, would it be a similar ratio as you head to your 2007 targets?

I would say that it won't be far off. Maybe it will move from 33% to 40% just because there is a fair amount of focus on hunting new logos, et cetera, but for now our embedded base as we've told the Street before has close to $50 billion of expense opportunity that's being in-sourced or, for the most part, in-sourced, small part outsourced, and therefore we're going to continue to focus on the 210 or so global 1,000 clients that we have, because there is so much opportunity in continuing to deliver for them.

Okay. Thank you.

Thank you. Bob.

Thank you, Cindy Houlton of RBC, you may go ahead.

Hi. Just a couple of questions. I guess the first thing, was there anything that was special that was going on in Canada? It appears that on a sequential basis that revenue was declined 9% from the previous quarter. Was there something specific FX related or something that resulted in the decline in Canada?

No, I don't think so. It was maybe just a bit of seasonality of certain clients' volumes were actually ramping in Canada as we speak for fourth quarter. But when you're of our size with the amount of work stations that we have, you are going to see some of those anomalies go up-and-down a bit.

But no, I don't think it's anything at all to be concerned with. We're physically ramping as we speak. We actually ramped very aggressively in third quarter.

So you were expecting a decline based on seasonality? Is that --

I think we were expecting a very slight decline, which is really all that was experienced and it was made up in other areas. I think that you will see that in fourth quarter you will see that that will be filled back in again.

Okay. And then a follow-up question, just on the international margin improvement. I know you have mentioned in the past doing trials with -- doing some trials in terms of offshore service delivery or Spanish-speaking in parts of Latin America servicing Spain. Any update on kind of where we are on that and how much that has had an impact? Is that part of the margin story? Just want to get a feel for how material --

It's minimal. We're at the very early stages of that. When we go into our next conference call and we wrap up the year, we'll talk a little bit more about our strategy, but you are right to point it out and there is a keen interest by many of our clients to enter several other markets that is primarily in-country business, or vice-versa where the in-country business is, we have clients that now want or are currently actually experimenting with nearshoring and offshoring. But I would say as it relates to actual -- the numbers for the third quarter, there was really no impact.

Okay. And then just a final question, you have a 10% operating margin target overall and obviously North America seems to be the largest contributor to your margin expansion, and you are talking about a pretty significant shift of your North American labor force over the next 12 to 18 months moving to this @Home program.

Could you give a sense of how much the margin target is associated with the @Home migration, meaning, should we assume there is a significant positive margin contribution? Are you assuming it's going to be fairly neutral? I just want to get a better feel, because that's an, obviously, a material shift in terms of your North American workforce.

We're very conservative in how we budget, and what I would tell you is that there is not a lot baked into our budget to get to the 10% numbers that relates to @Home.

With that said, @Home will be accretive, will be more profitable than operating out of the United States, but we view it as what will allow us to have upside benefits and so therefore for now, we're not going to budget it. We're a real believer in kind of starting to budget things as the numbers become more and more material rather than kind of projecting on something until it happens.

Great. Thank you.

Thank you.

Thank you. Our next question is from Eric Schlipf of Baird. You may go ahead, please.

Great. Thanks. My first question is on the margins within North America. Just curious when you talk about the growth, two-thirds coming from existing clients and one-third from new clients or new logos, if that shifted, next year you had more from let's call it the new logos or new customers, would that kind of compress margins at all or is that no impact?

It would have no impact.

No impact. And the next question, I guess is on the market dynamics around the @Home. We have seen some of the other competitors out there pushing at home kind of aggressively in the past 12 month. Is this something that your customers or existing customers have come to you and said we're interested in this, we want you to offer this? Or is this something that you saw the demand just through market research yourself and decided to start offering that?

We have been studying this space for over six, seven years and we knew that when we were building our GigaPOP technology that took us over five years that this would be an offshoot offering. This has all been part of an intentional strategy that we had had for a long time. As to have clients asked us about it, yes, they have, but the fact of the matter is that the types of clients that we do business with are consistently looking to operate with a player that can provide services to them typically in five or more simultaneous markets.

The reason for that is because they want their traffic distributed in such a way that no more than 20% of their traffic is in any one particular theater. And because all of our large clients, especially the financial service and the healthcare, et cetera, are extremely risk averse and they want to know that whether it be a SARS, a bird flu, an earthquake, a tsunami, a terrorism threat, et cetera, that these are nothing more than -- they are unfortunate events, but they're ultimately speed bumps to their overall business.

When we're doing now close to $1 billion a day in commerce on behalf of our clients, what we're try doing is build the most robust platform in the world that mitigates risk to a point where if in fact, we ever were to lose not just a facility, but an actual entire market, that in fact, we would still be able to process all of the interactions or all of the transactions and so more and more of our clients are asking for these types of capabilities.

By adding @Home, all that does is add another opportunity, another route for them to go to diversify the capabilities. The other point that it does for us is we have many clients that have some rather erratic volumes and the beauty of @Home is that many of the people that are interested in working in the at-home market are very interested in what I would call "Extreme flexible schedules." So consequently it allows us to better service some of the short-term erratic volumes that come in, which reduces our overall cost of having to train people who then ultimately become inefficient because the volumes are not consistently there to support them.

Eric, this is John. I would just add to what Ken said relative to that. There obviously are clients in the U.S. that really want to be in the U.S. with their service capability. Whether it's a governmental client or a private industry, the fact of the matter is there are people here that want to do it. So, to Ken's point in terms of how do we help serve those customers, this is a great opportunity for us. It also is a way whereby we can avoid, if you will, having to invest in a lot of brick-and-mortar facilities, which obviously are much more difficult to generate a return on in the U.S. than they are in other locations.

So, to Ken's comments earlier, in terms of trying to drive our ROIC, I mean, this is one of the strategies that we see that can help us get a better return on the capital dollars we plan to invest in the future.

Great. Thanks a lot.

Thank you. Robert Riggs of Credit Suisse. You may ask your question, please.

Thanks. Just have a couple of questions, filling in for Brandon. What was the contribution from Direct Alliance in the quarter? Have you broken that out?

It was probably about -- it was actually pretty small.

We're still on track to deliver the $35 million that we expected for the last six months of the year.

Okay. Great. And then going back to the training costs. As you start to look at some newer contracts, are you seeing any shift that those are including more cost-sharing from customers than you had seen previously?

What we are seeing is that the majority of the new contracts we're signing, we're now -- training is becoming pretty much commonplace as a separate line item.

Okay.

So we're billing it out separately and our prospective clients, as well as our existing clients understand why we need to do that, and are being very cooperative.

Great. Thanks a lot.

Rob, this John. Just to follow up, in the 10-Q you can see for the quarter the amount of up-front revenue for training that we billed and because of the accounting rules had to defer, but that amount if you go back and look over some of the previous quarters is actually increasing. Again, a reflection of the amount of people we had in training and the fact that we're moving towards up-front billing of these type of activities.

Okay. Great. Thanks.

Thank you, and our last question comes from Tobey Sommer of SunTrust Robinson Humphrey. You may go ahead, please.

Thank you. I'm interested in your perspective about how this feels compared to past expansions in the industry and in TeleTech specifically. In the past, some of these have been multi-year. We have seen capacity come in, following the last expansion, new sales are coming in at a nice pace, and it seems like you are getting better renewals, as well as contract terms that don't focus only on price. I was wondering if you could give us some color as to how it feels relative to past expansions.

Yes. A couple of things.

As I have said before, we believe that the entire business services category from 2001 all the way through 2004 and even part of 2005 kind of experienced for the first time in U.S. business history a triple whammy in that we experienced obviously the dot bomb, followed by 9-11, followed by global recession. And so during that period of time, that was the first time in TeleTech's entire history from 1982 all the way through to 2001 that we saw a slowdown in growth or that we weren't growing very rapidly.

In 1990 to 2000, TeleTech grew at an average compounded growth rate of over 49% per annum. From 1996, when TeleTech went public, we grew at an average compounded growth rate of over 36.6%, per annum all way through to 2000. So, it's too early to predict whether or not we're going enter another 10-year cycle, but what we would say is that this cycle for us started in the fourth quarter of 2005 and here we are now in the fourth quarter of 2006. So, give us another quarter or two and we'll start to at least feel like this is feeling more like a trend. That is point one.

As for adding capacity, I would say that not only TeleTech, but the entire industry, has become far more intelligent on adding capacity and that there is less of spending because of the amount of capital that was put into the marketplace from all the public offerings and secondary offerings, et cetera.

So, we're tending to add capacity much more in a just-in-time format and hence, that is why we were able to quote that with the amount of capacity that we brought on, 5,000 work stations, that the utilization has already achieved our goal of 85%. That is based on the fact that there is a very, very tight control between demand and supply that we choose to build.

The other point that I want to make is that because it took us from when we saw, when we basically were kind of down and out in the 2001 time frame I made it very clear that rather than just doing a classic turnaround what we really needed to do was to take advantage of transforming the company, and making sure that when we came across the river that we had a totally differentiatable product offering and that we had something that would truly become disruptive in the market place.

We believe that management has delivered on those capabilities and that we have something that is disruptive in the market place. Because of that, you will see significantly higher facility paybacks that will start looking in the nine- to 12-month range, versus what was 24 to 36 months, which is why we have confidence that our return on invested capital will, in fact, drive higher and higher year over year.

Thank you very much

Thank you, have a good day.

Thank you and that does conclude today's teleconference. Thank you for your participation.