TTEC Holdings Inc (TTEC) 2007 Q2 法說會逐字稿

Welcome to the TeleTech second quarter 2007 earnings conference call. I would like to remind all parties you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of TeleTech. I would like to turn the call over to Karen Breen. Thank you, ma'am, you may begin.

Thank you, and good afternoon. My name is Karen Breen, I am Vice President of Investor Relations and Treasurer. TeleTech is hosting this call today to discuss its results for the second quarter ended June 30, 2007. Earlier today, we issue a press release announcing that our quarterly report on Form 10Q had been filed with the Securities and Exchange Commission. This call will reflect items discussed within that press release and Form 10Q and TeleTech management will make reference to them this afternoon. We encourage all listeners today to read our quarterly report on Form 10Q. Speaking on today's call are Ken Tuchman, our Chairman and CEO, and John Troka, our Chief Financial Officer.

Before we begin, I would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to future plans and developments, financial goals and operating performance, and are based on our 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: the reliance on a few major clients, the risks associated with lower profitability from or the loss of one or more significant client relationships, risks associated with achieving the company's 2007 and 2008 financial goals, execution risks associated with expanding capacity in a timely manner to meet current and future demand, and the possibilities of additional asset impairments and/or restructuring charges. Please refer to the financial tables and both the press release and Form 10Q for the second quarter where we provide a reconciliation of nonGAAP financial measures. I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and good afternoon, everyone. I'm pleased to report another quarter of strong financial results which is a testament to the successful execution of our strategy to centralize, standardize and virtualize our delivery model through technological innovation. Our second quarter revenue was a record $330 million, up 15% from the year-ago period. The breadth, scale and geographic diversity of our offerings continue to fuel our growth and has enabled to us consistently deliver innovative front and back-office BOP solutions to both new and existing global 1,000 clients. Equally important are profitability continued to accelerate, as we reported a significant improvement in operating income. Excluding the asset impairment and restructuring charge related to Nugent, our second quarter operating income increased 122% to more than $29 million or 8.9% of revenue, compared to $13 million in the year-ago quarter, or 4.6% of revenue. Furthermore, if you exclude our second quarterly equity compensation expense of $3.2 million, our operating margin was 9.8%.

This strong revenue an operating performance led to a more than 100% increase in nonGAAP earnings per share in the second quarter. NonGAAP earnings per share grew from $0.11 in the year-ago quarter to $0.24 this quarter. Our EPS in the year-ago quarter included an approximate $0.06 tax benefit, which John will discuss later in the call. We continue to enjoy strong growth in our off-shore markets. Revenue from clients served in these locations grew 44% year-over-year to $132 million in the second quarter, representing a 40% of total revenue of our off-shore delivery capacity, which now spans eight countries and more than 20,000 worker stations. I believe this makes us one of the largest and most geographically diverse providers of off-shore services in our industry. With Costa Rica now operational, we are currently underway with expansion into South Africa, which will open later this year. We will have taken our off-shore BPO work stations for more than 13,000 at the end of 2005, to nearly 25,000 at the end of this year.

Our total off-shore delivery capacity at the end of the second quarter represented approximately 60% of our global delivery capabilities. During the quarter, we added 1,300 off-shore work stations to our business, bringing the total number of new work stations added this year to 1,800. The third quarter will again be our biggest quarter for new capacity with an incremental 3,500 work stations added in both off-shore and U.S. locations to meet committed and future demand for the fourth quarter and beyond. This puts us on track to add between 6,000 and 7,000 work stations during 2007 in six geographies, including the Philippines, Argentina, Costa Rica, South Africa, Mexico, and the United States. This is up from the original forecast of 5,000 to 6,000 work stations for all of 2007. We are confident in our ability to ramp these incremental 5,000 work stations during the last half of this year, given its span six geographies and we added 4,000 work stations over multiple geographic locations during the same period in 2006. Our ability to rapidly ramp this amount of new capacity further validates the scalability and technological sophistication of our global delivery platform.

Our solid financial performance has led to a significant increase in return on invested capital. Our RO -- our ROIC at the end of this year -- excuse me, at the end of this quarter, was 28%, double the 14% we reported in the year-ago quarter. We believe our ROIC today and in the future will continue to be industry-leading. Our goal is to reach or exceed 30% by the end of this year. We are very encouraged by the long-term growth prospects for our business. While our market opportunity is rapidly expanding, the competitive landscape of qualified providers is narrowing considerably. We believe our ongoing investment in innovative new offerings, along with our extensive global footprint has given us a highly differentiated global delivery capability in this burgeoning borderless economy.

As our industry continues to evolve, the historic rush to simply reduce costs has been replaced with the intense focus on elevating the customer experience. This shift to quality plays directly to our 25 years of experience and ubiquitous Six Sigma [biz] base processes resulting in many companies either exiting their BPO provider or their cast of operations and selecting TeleTech to help them enhance their competitive position. Given these market dynamics, our pipeline for new business opportunities remains strong and we're seeing a steady level of conversions to signed agreements. We continue to make significant investments in technology and human capital in order to meet the growing needs of our diverse client base and position TeleTech for increased revenue diversification and sustained top line growth. We believe we have the most modern and sophisticated IT-based delivery infrastructure in the industry. This has enabled us to not only reduce our capital and IT operating costs but to rapidly scale client programs faster and more efficiently than our clients and competitors. The leverage and operational efficiencies we are realizing from these investments is demonstrated by the doubling of our ROIC in just a 12-month period.

We've invested hundreds of millions of dollars over the past five years to centralize and standardize our global delivery capabilities. This has enabled us to create a significant barrier to entry while also consistently delivering a high quality solution to our clients and their customers. This is resulted in an increased client demand and retention rates. It has also given us tremendous speed and agility to instantaneously launch and ramp new offerings that are responsive to our customers' needs in the global marketplace. Furthermore, these technology investments have diversified our revenue into higher margin opportunities that include a comprehensive suite of proprietary human capital solutions that span recruiting, training, empowering and incentivizing employees. Because our industry has historically had a high human capital component, a significant amount of our investment over the past five years has focused on developing technology to optimize the entire employee life cycle. Given many of our client want to us deliver BPO solutions for them in as many as seven countries simultaneously, we need to be able to attract, screen, hire, train, engage and empower tens of thousands of employees around the world, while assuring a consistent high-quality BPO solution.

To that end we have developed and deployed sophisticated tools to, one, rapidly and cost-effectively recruit, screen, and hire employees worldwide. Two, two deliver exceptional blended training solutions through a combination of classroom, video and e-learning capabilities. And three, to engage and empower employees for exceptional performance. This is resulted in extremely high levels of client satisfaction and employee retention while simultaneously reducing our employee-related cost. Importantly, we see tremendous opportunity to grow and diversify our revenue by licensing certain aspects of these human capital capabilities to our clients. After significant investment and years of development, higherpoint.com our proprietary recruiting portal, is now deployed internally across the globe. And is allowing us to meet the robust hiring needs of our worldwide business. It has also enabled us to quickly access labor markets before formally committing resources or infrastructure such as Costa Rica and South Africa. Given the scale and the reach of this capability, we are selectively offering this to our clients as a tool for them to address their global recruiting needs. Recruiting process outsourcing, or RPO, is one of the fastest growing sectors of human resource outsourcing, and our investments in this area position us to capitalize on another fast-growing market opportunity.

Another example of our commitment to innovation is the investment we made in a world-class global e-learning capability known today as TeleTech University. We first began this initiative in early 2005 and after just two years, we now have one of the largest BPO-based curriculums of any publicly-traded companies. We currently average 100,000 e-learning course completions a month and our employees consistently rank their satisfaction with our courses at the top of the scale. This has helped improve employee retention while significantly increasing the quality and the delivery for our clients and their customers. Today I'm proud to say we have 10 TeleTech clients who have purchased our e-learning services as a stand-alone offering across financial services, retail, healthcare and travel and leisure verticals.

The last technology innovation I'll touch on today is TeleTech@Home solution. We've seen compressive growth from this since it was first launched at the beginning of the year. It capitalizes off the hundreds of millions of dollars we've invested in our centralized and standardized gigapop delivery architecture. Our @Home initiative is profitable and fully operational in three countries, including the U.S., United Kingdom and Australia. With plans for continued global rollout over the next 12 months. Up like many of our competitors, @Home offerings, the technology supporting the solution, was internally developed and offers innovative scheduling, security, and quality assurance capabilities. We are confident we will meet or exceed our goal of having 5% of our global employee workforce from home by the end of this year. These are just a few of the exciting technology-based initiatives that we are offering as we continue to bolster our position in newer, higher growth industries such as healthcare, financial services and retail.

Looking ahead, we will continue to invest in additional capabilities that will enable us to stay strategically relevant to our clients. We have several new technologies in our laps that we will roll out over the next several quarters, and we look forward to sharing these with you as they are launched. In summary, we are managing TeleTech for the long-term growth. We're continuing to lead the industry by being a technology-driven, Six Sigma-based organization. We have a solid management team, and we believe we have the best financial metrics and the most modern and efficient infrastructure in the world. Our global delivery capability has enabled to us increasingly diversify our revenue to meet the needs of our clients, while at the same time delivering strong results for our shareholders. We believe this strategy has set us apart, not only in our industry, but most monitory in the eyes of our current and prospective clients.

We are well-positioned for continued growth, given our 135 global clients, a 92% retention rate, and only one client over 10% of revenue. We have a solid management and operations team that has proven its ability to rapidly scale our business across multiple geographies and industry verticals. With this foundation in place, we're executing on our plan to achieve long-term growth and investing in proprietary capabilities that will not only differentiate us in our industry, but in also our clients' customers experience. Let me now turn the call over to John Troka, and after which I'll make a few closing remarks.

Thank you, Ken, and good afternoon to all of you who have joined us today. Let me begin by providing some additional insight into our second quarter financial results. As outlined in today's press release, and in our Form 10Q we reported record second quarter revenue of $330 million, an increase of approximately 15% over the second quarter last year. As we have stated before, our quarterly revenue may vary based on seasonally volumes and the timing of program launches. This is why our focus and guidance remains on longer-term growth and profitability targets. Our gross margin this quarter improved 230 basis points to 27.9% compared to the year-ago period. Several factors contributed to this improvement, including: new and expanded business, driving increased capacity utilization from the year-ago quarter, continued growth in our off-shore locations, aggressive focus on improving profitability in certain client programs, and our ongoing cost improvement initiatives.

Our second quarter SG&A as a percentage of revenue was 15%, down from 16.9% in the year-ago quarter. Included in our second quarter SG&A was a $2 million benefit primarily from our semiannual actuarial review of our North American workman's compensation and healthcare liability due to improved claims experience. This was partially offset by higher incentive and equity compensation expense of $5.2 million versus $2.9 million in the year-ago quarter. As part of our ongoing commitment to enhancing shareholder value, during the second quarter we determined that it is more likely than not that we will divest of our database marketing and consulting segment. Our second quarter results reflect a $13.8 million asset impairment and restructuring charge primarily related to this segment, which lowered GAAP EPS by $0.11.

Our second quarter operating margin excluding the asset impairment and restructuring charge, was 8.9%, nearly double the 4.6% in the year-ago quarter. GAAP EPS was $0.13 for the second quarter, and included the $0.11 asset impairment and restructuring charge. Excluding this charge, our nonGAAP EPS was $0.24, again, more than double our nonGAAP EPS of $0.11 in the year-ago quarter. The year-ago quarter included a $5.2 million or an approximate $0.06 tax benefit from the reversal of certain deferred tax valuation allowances in our international locations. Second quarter results included $3.2 million of equity compensation expense, or nearly $0.03 per share, which lowered our operating margin by approximately 100 basis points. This compares to $1.9 million or approximately $0.02 per share of equity compensation expense in the year-ago quarter. Turning to taxes. Our effective tax rate for the quarter was 28.6%. Our effective tax rate was reduced this quarter by the asset impairment charge. We continue to believe our full-year effective tax rate will approximate 35%.

As for our balance sheet, we ended the quarter with $60 million in cash, our debt-to-equity ratio at the June quarter end was 13%, giving us plenty of capacity to fund our future growth initiatives. Our DSOs were 66 days in the second quarter and at the low end of our target willing range of 65 to 70 days. Our strong financial position has enabled us to repurchase $23 million of our common stock during the second quarter. Since inception of our buyback program back in 2001, we have spent nearly $140 million, approximately -- acquiring approximately 20% of our shares outstanding. We continue to actively buy back our stock, further demonstrating our strong belief in the future prospects of the company.

Our capital expenditures were $15.5 million in the second quarter, up slightly from the year-ago quarter. Approximately 80% of our capital spending was for growth-related needs with the balance for maintaining our embedded infrastructure. In the second quarter, we added 1,300 off-shore work stations, and as Ken mentioned, we are in the process of adding approximately 3,500 in the third quarter. We believe our total capital expenditures for 2000 will now range between $60 million and $70 million, reflecting our increased case of new business wins. Free cash flow was $3.4 million for the quarter, up from a negative $6.7 million in the year-ago period. The improvement in our liquid at this is primarily the result of our increase in in the case.

Regarding our business outlook for 2007, we are reaffirming our previously stated goal to end the fourth quarter with a $1.5 billion revenue run rate and a 10% operating margin. As we plan for 2008, one of the previous discussed operating levers to improve profitability includes our ongoing profitability improvement initiatives. To that end, in late July, we eliminated certain SG&A opposes in our North American, therefore, centers as a result of our ability to receive greater operational efficiencies, stemming from our investments in standardizing, centralizing and further automating our global delivery capability. This will result in a third quarter restructuring charge of approximately $2 million. We believe the annualized savings will approximate $8 million to $10 million per year, and will contribute to our goal of achieving a 200 basis-point improvement in our full-year 2008 operating margin.

In conclusion, we are very pleased with our strong financial performance in the second quarter. We continue to enjoy strong demand for our expanding array of offerings as is demonstrated by our seventh quarter of double-digit top-line growth. In addition, our focus on leveraging our ongoing investments and our global delivery capability continues to drive increasing profitability. The combination of these factors puts us in a solid position to continue our track record of profitable growth. With that, I'd like to turn the call back over to Ken.

Thank you, John. Before I give my closing remarks, I'm pleased to announce that our board of directors that is authorized an additional $50 million to the company stock repurchase program, reflecting our continued confidence in the long-term prospects of our business. With the increased authorization, we now have $67 million available for future share repurchases.

In closing, TeleTech's second quarter results further build on our track order of successfully managing our industry-leading growth through a highly-integrated Six Sigma-based global delivery molding. With 25 years of experience in this industry, we have a firm belief that our long-term financial viability and success will be driven by our commitment to technological innovation. Not only will this create increased revenue diversification opportunities, but it will enable us to continue to deliver high-quality scalable solutions to our clients. With a front-to-back office BPO industry estimated at $5 trillion, we are confident that TeleTech will win its fair share of this opportunity.

Further, we believe our current scale, industry leadership, will enable us to deliver superior long-term financial performance. As we prepare to celebrate our 25th-year anniversary in October, I am very proud of what TeleTech and its employees have achieved over this time and appreciate our loyal, and long-standing global client base. I'm even more excited about the business opportunities ahead and look forward to sharing these and other accomplishments with you in the coming quarters. With that, we'll open the call to your questions. Thank you.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) One moment please for the first question. Ashwin Shirvaikar, your line is open. Please state your firm name.

Citigroup. Hi. Congratulations, Ken, on the quarter. My first question is.

Thank you.

As you bring together @Home and HighPoint and all the other technologies, where does that point in terms of the per workstation cost of delivery going forward? In other words, where can you move your gross margins to?

Well, that's a hard question, only because it tends to lead a form of guidance. What I would say is, is that we believe our gross margins are going to go up over the next couple of years, and we're confident that we can have gross margins over time that will approach in the 30% range. And with us continuing to reduce our cost of services sold, obviously, the combination of those two things taking place allows us to put forth a better bottom line over time.

Okay. Thanks for that. And I guess given the good cash flow reserves, and, obviously, you guys have increased the size of the buyback here, but as you look at buyback versus investing in organic growth versus acquisitions, where do you stand along that continuum?

Well, we -- I would say that we put our buyback in third position as it rates to priorities. So our first priority will always be organic growth. Because our business is free cash flows so well and we're capable of very comfortably growing our business organically and meeting all the demand requirements that are coming at us right now, then I would say the second priority would be to seek out strategic acquisitions. With the private equity players now potentially being taken out of the marketplace for a period of time while all this debt starts to get restructured, etc., it's our belief that the market is going to maybe be a little bit more realistic and we'll be able to participate in some of the opportunities that are out there. We've been looking at companies over the past several years and now we believe that we actually have an opportunity to make -- to potentially do something that's meaningful and potentially futuristically material in the area strategic acquisitions.

That said, with the PE's companies driving the valuation so high, our commitment has been that we're only going to do acquisitions that are accretive to shareholders in the 12 -- after the first 12-month period. So therefore, that's really been the limiting factor. So I think that what I would say to you is, is that we're hopeful that we will be able to get some acquisitions done, we're very pleased with the DAC acquisition that we've done, and now we're looking forward to other acquisitions. And then lastly, the last priority would be purchasing our stock, but what we want to do is actively utilize our balance sheet and not just allow cash to build up and not try to do what's in the best interest of our shareholders. So it's our belief that by buying our shares back, reducing the shareholder -- reducing the actual flow, is a good thing. But if we do find an acquisition, then most likely that activity will come to an end, since we'll go from a net -- zero net-net debt position to a debt position.

Thanks. And last question, I guess is with regards to -- with Nugent as good as divested, I guess is one way to think of it, does your guidance, this is just a clarification, does it include the benefit of it? I notice that you don't have it stated yet as a discontinued operation. So where do we stand exactly?

Ashwin, this is John Troka, let me address that. Nugent is not considered a discontinued operation at this time as we're still assessing the various alternatives that are available to us. The guidance that we've provided assumes that Nugent continues to be an asset of the company.

That said, we are in active negotiations with multiple parties regarding potential strategic alternatives, and we look forward to updating the street when we have a -- something that we believe is definitive.

That's good to hear. Once again, congratulations.

Thank you very much, Ashwin.

Thank you. Bob Evans, your line is hope.

Craig-Hallum Capital. Good afternoon, and, again, congratulations as well. Can you comment a little bit on the international business? I see there's a big swing Q1 to Q2 in terms of the profitability there. What drove that, and where do you think you can get the operating margins on the international side?

Yes. We were very pleased, obviously, with the improved performance of our international segment. A couple of things behind that, obviously we've got some growth on the revenue side that we're seeing in our international segment as we continue to focus on bringing those particular regions back into a profitability level and a growth level that we're happy with. We are seeing, again, increased activity between our home countries in the international segment, such as the UK, and some of our off-shore environments, which is also improving the profitability overall. So as companies are moving from the UK to the Philippines or from Asia-Pac up to the Philippines, in other cases we've got companies out of Spain going into Latin America. All of those things are contributing to an improvement in that profitability. The other thing going on in the international segment, this is a positive again for TeleTech overall, is that we do have that diversity in the revenue relative to various currencies. And so as the U.S. currency has suffered a little bit in the markets, some other currencies, such as the pound and the euro and the Aussie dollar all have strengthened a bit. So we get some of that benefit.

Okay. Okay. That's helpful. And Ken, can you comment a little bit in terms of you're opening a lot of seats in Q3 in particular. Where is that business coming from? If you can't be specific, by customers, could you talk a little bit from a vertical and how much is from -- how much of that is from new customers versus existing?

We're seeing a fair amount of business, Bob, coming from new customers that we have not yet announced. And we are hopeful that we'll be able to announce them in the near future. So these are coming from new customers. They're coming from customers across multiple verticals: healthcare, retail, which would be more of the embedded base, technology, and we're also seeing in the media and entertainment area quite a bit of activity there, an increase there, etc. We're seeing really kind of two things taking place in the marketplace, which is a bit of a new trend for us.

Historically we have always brought on, I'd say, 90% plus, maybe 95% what I'd call virgin business, business that's never been outsourced and was only being handled internally. Now we're still winning our fair share of that business, but we're also now winning quite a bit of business that we have not been targeting but where the targets are coming to us and they're either closing down their own captives or choosing to consolidate vendors. As I've said for a few years now, we believe that this is turning into a marketplace that's going to have far, far fewer vendors that have scale and capability and technology innovation, and what we're hearing in the marketplace and what we're seeing in the marketplace is that there's a true scarcity of people that can provide a consistent uniform capability across the globe. And so consequently, if -- when we with talk to our clients, and new clients and prospective clients, and ask them what made them make the decision to go with us, we're kind of hearing a very consistent message, and that's a bit of a a recap of the message that we're hearing.

And if you're going to make a ballpark guess between how much was virgin business and the latter category of captives and consolidating vendors of the new 5,000 seats you referenced, what would that mix be?

It's probably two-thirds to one-third.

Okay. And final question for John, the SG&A comment that you had made, you said there could be savings of $8 to $10 million. I was interrupted slightly during that comment. Can you give a little bit more clarity as to what that's from?

Again, that's $8 to $10 million on an annualized basis. And it's related to some restructuring we did in our North America centers going back again having deployed a lot of the new technology and the standardized processes. We know back and took a hard look at how we were managing those facilities and because of, again, our investments, are able to take certain positions out without losing any of the quality or delivery capability that we need.

Okay. And when do you start to see that benefit?

And that -- those -- you're really going to see the benefit of that is really more of an '08 benefit on a run rate basis just for clarification.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Shlomo Rosenbaum, your line is open. Please state your firm name.

Stifel Nicolaus. Thank you very much for taking my question. Good quarter, everybody. I want to just ask a little bit about getting more into TeleTech@Home, it seems like it's really getting off the ground. I want to ask how this is helping in terms of the domestic attrition, and whether the attrition goals that you guys have had in terms of lowering that, are they being met by the TeleTech@Home offering, and how is that shaping up?

Yes. I think that it's -- unfortunately, it's just too small of our overall work force for it really to be moving the needle on the retention side. Clearly, that is one of our goals, and clearly that's something that we think we'll start to see the real benefits realistically a couple years from now when it's a significant portion of the overall labor force. But I think that even next year, even if the business more than doubles next year and beyond that, it really need to start to be in the 25% range of our labor force for it to really have an impact of moving the needle as it relates to retention. But that said, that is clearly one of many strategic goals as to why we're putting so much investment in that area, and marketing it so heavily.

Can you also just confirm that you don't have much if any exposure to the mortgage market?

We have, to the best of my knowledge, zero exposure. We are doing no business, to the best of my knowledge, I'm looking at Karen and John, we are doing no business with any subprime operators and any of the mortgage processing business that we're doing is, A-type credit, mortgage processing, etc., and so no, we do not see any risk whatsoever in that area.

And on just the last one, if I could squeeze in, could you talk about the wage inflation in the Philippines and what are you seeing over there? Are you able to mitigate that by just a lot more lower-level hires, or just how you're addressing that, if you could just go through a strategy on that again?

Well, first of all, I think it's safe to say that there's wage inflation that's taking place pretty much across the globe. The Philippines, that said, it's nothing like we've seen in India or any other markets that have just become incredibly competitive. The wage inflation for us has been really manageable because we've sought out a strategy that I guess has been very different from the majority of the marketplace. And that is, the majority of the marketplace is built their facilities in central Manila or in many cases in what's called the luxury district, downtown Makati. And if you look at a map of the concentration of business process operators, call center operators, and IT outsourcers, I believe the number -- and I don't -- I'm -- I hope I'm not giving you the wrong number, but it's close to 70% plus of the whole industry is in the central Manila district. And so consequently, where we -- what we have done is we have out of our way to build all of our new builds and the majority of our centers either on the outskirts of the Manila business district or in totally different provinces in the Philippines that require an hour and a half jet flight to get to.

And so consequently, our wages started out at a lower rate, we have very little competition in those markets, and it's really, quite frankly, something that we have practiced all over world and will continue to practice. And each time that you see we announce a new facility in the Philippines, you're not going to that we're announcing them in Manila or Mikati. So I think that's had a real big benefit. And then the other thing is in other cases, we've had to go back to many of our clients and we've had to ask for price increases. And we have made it loud and clear that at the end of the day, a big cost of our services is labor, and because virtually all of our contracts have cost-of-living increases, we adjust with the local cost on an annual basis. In some indications, if we see some type of an unusual labor bump or currency bump, etc., we also go back to our clients and ask for midterm adjustments, and have successfully done so in the past several weeks, as well as several quarters, and have done this over the years. Quite frankly, that's the only way that one can maintain consistent -- more of a consistent basis of earnings, if you have your clients working with you in that regard. Otherwise, it just becomes a vicious cycle of attrition and of quality and then ultimately attrition of clients.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Dhruv Chopra. Your line is open. Please state your firm name.

Morgan Stanley. Good afternoon.

Good afternoon.

A quick question on some of the international BPO side. I know one of the things you've talked about is improving the profitability on some of the in-country contracts. I just wanted to find out where you are in that process, and maybe on a scale of one to 10, where do you see yourselves now, i.e., how much more to go?

Dhruv, this is John. Relative to that, I guess the quick answer to the question is it's probably at about five. We believe that there's still work for us to do in terms of improving the profitability of many of our clients, and as Ken just indicated, we're actively going back in those areas that we are seeing pressures and making sure that we get those issues addressed. As we talked about previously, one of our key strategies going back to key clients, especially those that are not actively in an off-shore location and working with them to take them to a particular location where we can drive not only a benefit to them, but also a benefit to ourselves.

Great. And I have two more questions real quick. One on -- can you update us on the progress on on-demand? I think last quarter you talked about potentially several wins which weren't announced, but can you give us an idea on the client update there?

Yes, we have won some accounts, and I'm embarrassed to tell you I don't know the reason as to why we haven't put out announcements. My guess is that they're client based and we're in the process of launching them right now. We're also in negotiations with multiple accounts as we speak that are looking for large-scale kind of global capabilities, and are looking to get off of their platform. We think futuristically the whole concept of people maintaining and managing edge-based technology is really going to become a thing of the past. And we believe that our clients are beginning to see the benefits that there's a significant benefit in them taking advantage of something that we've already built and that we operate 24/7 with close to for nines of up time. We are making progress in that area. That said, I have to be really frank with you and just tell you that the overall core BPO business is really experiencing some nice growth right now. And I'd say that it's safe to say that the majority of the hands on deck are very focused on really growing the overall core business, as well as implementing and executing the core business. So we think that long term that on-demand will be a real business and a business that is truly a contributor. I mean, it is profitable today. But at the same time, we want to make hay while the sun is shining, and there's a lot of opportunity in the marketplace.

Great. And then just a quick final question, going through your Q, it appears that you bought back a ton of the stock in May and then that fell off in June. Was there any particular reason there or --

No, there really wasn't any particular reason, we were really aggressive, and we were just opportunistic in buying, especially when we felt the stock was a good value.

And we're still buying now. We're still in the marketplace buying now. So, yes. So quite frankly, we've just come to the conclusion that if we just continue to keep putting the numbers on the score board, the stock will ultimately take care of itself, and we think that there will be very nice -- a nice stock price for investors to take advantage of.

Great. Thank you.

Thank you, Dhruv.

Matt McCormack, your line is open, please state your firm name.

Yes, hi, FBR Capital Markets. First question, on your new business pipeline, could you possibly quantify how many new customers you're expecting to sign by the end of the year and how many you've signed year-to-date?

Yes. We've always had a goal -- because we've always been kind of a large-deal company, we've always had a goal of signing eight to 12 global new logos, what I'd call global 1,000 logos per annum. We're on tracked this that this year again as we did last year.

Okay. And then turning to I guess your Canadian operations, you did talk in the -- in your Q about the Canadian dollar and that continues to strengthen. And then you also said you're adding in the North -- I'm sorry, you're adding in the U.S., in your press release. So I guess could you just update us on how you look at your Canadian capacity, and if the Canadian dollar's making it less cost-effective than the United States itself?

Yes. This is John. I mean, relative to the Canadian dollar, obviously, we have watched that closely. What's interesting is if you look at the trend of the Canadian dollar and its conversion against the U.S. and the first half of last year, versus the first half of this year, it's really consistent. I mean, if you go back and look at it. So, in terms of capacity, we are not adding any additional capacity in Canada for that reason. We did announce that we're adding some additional capacity in the U.S. And I think one of the key things to understand is when we do add capacity in the U.S. or in higher-cost markets, it's typically because we have found a customer who is willing to pay the incremental rate necessary to be in those markets. We are not going to open capacity in places that will not allow us to earn the type of return that we expect and to do the things needed to meet the commitments we've made.

Okay. Great. Thank you.

Thank you. Our next question comes from Tobey Sommer. Your line is open, please state your firm name.

Thank you. Sun Trust Robinson-Humphrey. A followup to the most recent question, the U.S. capacity that you're adding, is that from a new customer and potentially a new -- a customer new to outsourcing, or is that an expansion of an existing relationship?

There's really two facilities that are driving that -- or that we're adding in the U.S., both of them, if you will, have been committed and they have been committed to existing customers who are growing their business with us.

Okay. And then it looks like if I do my math right, you're going to grow your capacity about 20% this year, and I was just wondering, given that most of it is going off-shore, what sort of ratio perhaps of capacity growth should we think of driving a specific level of revenue growth? In other words, if you're growing the capacity 20% off-shore, does that imply the 12% to 15% revenue growth that you're looking for, or is there some other kind of methodology we can use to draw a connection between the two? Thanks.

You're ask -- this is Ken Tuchman. You're asking a very -- a good question, but one that, if we gave you an answer, it would be fluid in that it's just changing so fast. As an example, we really have not been in the market or been focusing on adding U.S. capacity, but the fact is that we've been drawing down our capacity with future commitments, and commitments in such a fast rate that we had no choice but to add U.S. capacity. And our clients are really moving towards a very hedged model where they're asking us to operate in, as we're saying -- as we said, in up seven different theaters simultaneously. So consequently they want, some in the United States, some in Latin America, some in Asia, and futuristically now coming up some in Africa So they want it -- it across all the different contents. So there's really not a way of giving you a metric that you can look at, because naturally the revenue per position in North America is significantly different than the revenue per position is in Latin America, or which is different than in certain parts of Asia, because the Philippines is going to be in one area, whereas Singapore or Malaysia's another area. So, I hear what you're asking, I'm not trying to avoid your question, I just don't have a good way for you to have a good rule of thumb.

Okay. Fair enough. And then I was curious about your employee retention you said was at record levels. I was wondering if you could comment on the recent trends perhaps in the quarter of customer retention vis-a-vis maybe a comparison to a year ago, as well as in the first quarter on a sequential basis? Thanks.

Yes. I don't think that -- I think what we said was our client retention is at a 92% level, and we're actually the one that's causing it to even be at 92%. because it's all part of our global profitability improvement that we've been working on for the last 18 month to two years, and still feel we've got about another 18 months in front of us. And so, consequently, that impacts some of the retention. The point is is that our retention, from a client standpoint is very, very low.

Right. In terms of the 8%, maybe attrition at your own voluntary, I guess, is that concentrated within any particular industry? Are you seeing a lack of willingness to adjust prices to the new market reality concentrated with any particular verticals?

No. Not at all. There's no correlation anywhere. We actually have looked for that to see. I'd say that now more than ever, though, clients are recognizing that gas is -- gas costs are up, which is a significant expense to employees, food prices are up, etc. And there's no denying that wages are going up, and so, therefore, they are realizing if they were to do this internally in a captive, that they would have to bear these costs. And so they're being reasonable. Also, the other thing that I would tell you is, there's such a push towards quality right now that they realize that if we're not paying people at a competitive wage, then all it does is impact their quality. And that it's just -- it ultimately turns into a physics issue. So we see clients being very, very realistic, and then I think the last point I would make is our relationships are becoming far more strategic with our clients than they were even historically.

And so although the global sourcing and procuring departments are involved with many of the decisions, so is the CEO, the CFO, the COO and other forms of executive leadership. And they're really driving, because the board is dictating that they have to get their act, so to speak, cleaned up and together as it relates to how they face the marketplace, not just in the front of house, but back of house, because the back of house also impacts the customer experience. And that's also helping us with our clients being more realistic and more empathetic.

Right. Now, one last question, thank you for indulging me. In terms of competition, there are a couple of -- a few global competitors and then smaller regional players that probably don't compete on the same level. In terms of those global competitors have you seen any changes in their behavior in the market?

We're really -- right now, I'd say in the last two quarters when we survey our sales force, we're running into fewer and fewer competitors than, quite frankly, ever before. We'll see every once in a while, we'll see [Gen-Pac], we'll see IBM, we'll see Accenture, sometimes we'll see an Infosys, sometimes we'll see a [Widpro], but that's it, that's all we're seeing in the market place. Naturally, there's always going to be price-testing dummies in the marketplace where a client will come to us and bring up for lack of a better term, a company that let's just say is somewhat irrelevant, based upon their financial performance or their size or their scale or their technology capabilities, and we just simply say to them, you know what, there's a reason why they're in that situation and we fully respect if that's with a you're focused on, but we can't get there. After our clients meet with us and visit us and actually experience the technology after they talk to our clients -- after prospective clients talk to our clients and after they visit our facilities, we get that we're offering something that's pretty unique in the marketplace.

Thank you very much.

Thank you.

Thank you. Tom Smith, your line is open. Please state your company name.

First Analysis. Thanks guys. I just wanted to touch on the international BPO segment again. I was just wondering, what are your expectations for that as far as margins going forward? Do you think the 5% plus is sustainable or what are your thoughts?

Yes. This is John. I mean, obviously, again, with the guidance that we've provided relative to where we want the company to be, it's our expectation that those margins will be coming up well beyond 5% because we've got to get the company t over 10%. So we're not going to allow the international segment to be a drag on that commitment.

Yes. I think the street should system we're not interested in revenue for revenue's sake and we're not going to trade dollars. So, if we have markets that are over a period of time we capital see them being accretive to our earnings, we'll do what's appropriate to those markets, down to and including divesting of them.

Okay. And then just a quick one on the SG&A line, it looks like you've got a lot going on there, you had a $2 million benefit this quarter and then you're going to have a charge next quarter. What's the best way to think about that going forward with all these charges going on?

I mean right now, we are managing our SG&A to be roughly 15% to 16% of revenue and targeting it to be in that range. Obviously, watching our equity compensation, making sure that that's relative our performance as well. But that's kind of the target that we have right now. Again, as we continue to scale to a much larger size, we would expect that to come down.

Okay. All right, thanks a lot.

Thank you.

Thank you. And our last question comes from Cynthia Houlton, your line is open. Please state your firm name.

Hi, RBC Capital Markets. Just a question on I think on the -- the employee attrition was asked before, and Ken, I'm not sure if you really addressed any changes or kind of trends that's happening on the employee side. I know you talked about customer attrition. But could you just comment on what's happening on the employee side, any changes that are occurring?

Yes, I think it's really in keeping with the conversation that we've been -- that we've had throughout, which is that it's safe to say that in the markets where unemployment is as low as it is in the United States and Canada, that naturally our attrition during those times, and we've seen this over a 25-year period of time goes up. That said, it tend to always be, for lack of a better term, a temporary effect. Because it's really just tied to the law of supply and demand. And we think that if the economy starts to adjust, that that will self-correct itself. What we are doing is we've been very, very proactive in the human capital area, and we have a significant amount of programs and capabilities that we have designed proactively to try to mitigate as much attrition as possible. And so therefore, it's probably not affecting us in anywhere near the same fashion as it might be other organizations in the space. So I'd say, overall, attrition is probably up in North America, it's budgeted for in our numbers, and it's something that we're comfortable that we can manage through this current low employment cycle.

And then just a revenue question just on two segments. First, what was the DAC revenue in the quarter? And then revenue from all of the new initiatives, if you kind of bucket all that together, was that still kind of in that 10% of total revenue, or is it moving up, or just kind of where are we on the new initiatives in DAC?

Yes. The DAC revenue is $15 million, approximately, for the quarter. And then, again, our expectation, obviously, I've got a lot of activity with [Judy Han] coming on board in the second quarter and her new management team. They have actively targeted the market and have much -- many --

A robust pipeline of new logos that were in the process of either launching or in the process of converting, etc. So we're sticking to our minimum annual commitment growth beginning next year of 25% or more.

Okay. And then just a new service initiative revenue, like @Home.

I'm not hearing you clearly.

Yes. I didn't hear what she said.

I'm sorry, the combination of all the new service, on-demand, @Home, Highpoint, if you aggregate all of them, what was the revenue in those segments?

Are you there, Cynthia?

Yes, I'm sorry, did you not hear? I'm sorry. The new initiative revenue, just what on-demand, Higherpoint, @Home, if you add all those together, what was the contribution from all the new initiatives?

We haven't disclosed that, and I would say on an overall basis it's still small relative to whole, but if sometime that were to grow, it's possible we would break it out. But we haven't done so yet.

Great, thank you.

Thank you.

Thank you. This does conclude today's TeleTech conference call. Thank you all for joining. You may disconnect at this time.