TTEC Holdings Inc (TTEC) 2007 Q4 法說會逐字稿

Welcome to the TeleTech business update conference call. (OPERATOR INSTRUCTIONS). This call is being recorded at the request of TeleTech.

I would now like to turn the call over to Karen Breen, TeleTech's Treasurer and VP of Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us on today's call. Participating with us today is Ken Tuchman, our Chairman and Chief Executive Officer, and John Troka, our CFO, to discuss the filing of certain SEC reports, the completion of our financial restatements and our updated business outlook.

Before we begin, I want to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to our operating performance, financial goals, business outlook and future plans and developments which are based on management's current beliefs and assumptions. Such statements are subject to various risks, uncertainties and other factors that may cause our actual results, performance and achievements to differ materially from those described. Such factors 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; risk associated with achieving the Company's updated business outlook; execution risks associated with expanding capacity in a timely manner to meet demands; and the possibility of additional assets, impairments and restructuring charges.

A replay of this conference call will be available on our website through July 31, and I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and thank you to all participants for joining us on this morning's call.

I am very pleased to announce that we have completed the restatement of our historical financial statements, of which the majority of the adjustments pertaining to years prior to 2001.

I would like to thank our independent audit committee, along with our outside consultants, for all their efforts and support during this process, as well as our finance and accounting teams who have reviewed more than 12 years of financial records and have literally been working around-the-clock to get this completed.

This morning we will begin by having John Troka, our CFO, provide an overview of the restatement, as well as discuss our [2000] full-year and first-quarter 2008 financial results. After that, I will provide an update of our business outlook.

I will now turn the call over to John Troka.

Thank you, Ken, and good morning. Before I begin, I also want to thank our shareholders, our Board of Directors, the senior leadership team and all of our employees for their patience and support over the last nine months as we have worked through this process. I want to thank our audit firms, PriceWaterhouseCoopers and Ernst & Young, for all their efforts and guidance.

And finally, I want to extend a special thank you to the members of my team and their families for their self sacrifice and tireless efforts which have brought us to this point today.

Let me now first summarize our financial restatements and then review our financial results for 2007 and for the first quarter of 2008. Yesterday we filed with the SEC our Form 10-K for the year ended 2007 and our Form 10-Qs for the third-quarter 2007 and first-quarter 2008. With these filings now complete, we believe we have regained compliance with NASDAQ's continued listing requirements and are awaiting NASDAQ's acknowledgment that we're current with all of our periodic reports.

Given the volume of information that we filed today, let me briefly summarize the restatement adjustments.

As we previously announced, the audit committee undertook a voluntary independent review of our historic equity-based compensation practices and related accounting. This review was completed with the assistance of independent outside consultants in the first quarter of 2008. While it found no willfulness misconduct in connection with equity-based compensation practices, it determined that we had made certain mistakes in the accounting for equity-related compensation expense that required correction.

During the course of completing the equity-based compensation accounting adjustments, we determined that there were other adjustments to our previously filed financial statements that were required primarily in the area of lease accounting. The majority of these adjustments, however, pertain to periods prior to 2001.

While the impact of the financial restatement is discussed in greater detail in our Form 10-K and Form 10-Qs, let me briefly summarize the accounting adjustments for you. The incremental charge for equity-based compensation for the 11-year period from 1996 through June of 2007 was a pretax non-cash charge of $59.7 million with the majority of these adjustments related to periods prior to 2001. The incremental lease and other accounting charges for that same 11-year periods resulted in a pretax charge of $5.6 million. The majority of these adjustments also pertain to periods prior to 2001.

It is important to note that the net charge to shareholders equity at the beginning of 2005 for the majority of these accounting adjustments was less than $1 million. We estimated that the total incremental cost of the review and restatement paid to third-parties' professional fees will be approximately $21.5 million, of which $11.5 million was incurred in 2007.

Let me now turn to the second topic of our call, which is a summary of our full-year 2007 financial results. TeleTech reported 2007 revenue of $1.4 billion, a 13.1% increase over 2006. Full-year revenue in the BPO segment was $1.35 billion, a 15.5% increase over 2006.

Exiting the year, we achieved a $1.5 billion annualized revenue run-rate that we first set forth as our goal back in early 2004. Our income from operations for 2007, exclusive of asset impairment, restructuring and restatement-related expenses was $116.2 million or 8.5% of revenue. This represents an increase of 220 basis points over the 6.3% normalized operating margin we reported in 2006.

Furthermore, excluding equity-based compensation expense of $13.4 million for 2007, our operating margin would have been 9.5%.

Fully diluted non-GAAP EPS for 2007 exclusive of asset impairment, restructuring and restatement-related expenses grew 46% year-over-year to $1.05 as compared to $0.75 non-GAAP EPS in the year ago period.

Our strong balance sheet and free cash flow has continued to fund the majority of our organic growth and share repurchase program. Our 2007 free cash flow grew 28% to more than $42 million from $33 million in 2006. We ended the year with more than $91 million in cash and a return on invested capital or ROIC of more than 27%.

During 2007 we acquired nearly $47 million of our stock. Yesterday we announced that our Board of Directors has increased the funding for share repurchases up to $100 million, an increase from the $53 million that remains under the current authorization.

Let me now review our 2008 first-quarter results. We achieved our 10th consecutive quarter of year-over-year double-digit revenue growth. First-quarter revenue was a record $368 million, representing a 10.5% increase over the year ago quarter. Income from operations for the first quarter of 2008, exclusive of $2.2 million of restructuring and $5 million of restatement-related expenses, was $36 million or 9.8% of revenue. This represents an increase of 80 basis points over the 9% operating margin we reported in the year ago period.

Excluding equity-based compensation expense of $2.7 million, our operating margin would have been 10.5%.

Fully diluted EPS for the first-quarter 2008, exclusive of restructuring and restatement-related expenses, grew 42% year-over-year to $0.34 per share as compared to $0.24 in the year ago period. Our strong balance sheet and free cash flow for the quarter have continued to fund the majority of our growth. Our first-quarter 2008 free cash flow was $11 million after we funded $15 million of capital expenditures. We ended the first quarter with more than $98 million in cash and an ROIC of 27%.

In summary, we're very pleased to have the restatement behind us and to have delivered 10 consecutive quarters of strong performance. We look forward to continuing to advance our industry-leading position and capture additional marketshare.

Let me now turn the call back over to Ken to discuss our updated business outlook.

Thank you, John. Now that John has reviewed our full-year 2007 and first-quarter 2008 highlights, I would like to discuss our updated business outlook. Before I do that, I would like to reiterate how pleased we are with our strong performance in both 2007 and in the first quarter of this year. We have delivered two and a half years of double-digit revenue growth and improved profitability in every quarter.

In addition, we achieved the goal that we set forth at the beginning of 2004 to reach a revenue run-rate of $1.5 billion. As we look to the balance of 2008, I feel very good about the health of our business and the strength of our management team. We believe we have the ability more than anyone else in our industry to control our future during this challenging economic period in both the US and Europe. Given our strong balance sheet and long-standing client relationships, we have always maintained a level of candor and transparency with our investors, and today we want to provide an update regarding recent trends in our business. We view the revision to our outlook as prudent in this economic environment and believe it is temporary in nature as we actively continued to win and ramp new business.

Let me review those business trends with you now.

First, we have believed for some time that as the global economy slowed, it would create a catalyst for both new and existing clients to more aggressively embrace outsourcing as a proactive strategy to address economic downturns. We are happy to say that we have seen exactly that.

Our pipeline of new business opportunities continues to be the strongest in our history. We have signed $302 million of estimated new annualized incremental revenue over the past nine months ended March 31, 2008. We believe our second-quarter signings, although seasonally lower, will also reflect another strong quarter of new business wins. The fact is that we are in discussions on more 500 to 1500 workstation deals than we have ever been working on in the past. And this is across a wide range of verticals, including financial services, telecommunications, health care and others.

While the good news is that our pipeline is increasing in size and converting at a faster rate, several of these new business wins are taking longer to ramp, given many of them are more than 1000 workstations in size and being simultaneously deployed across multiple geographies.

Additionally some of the new work is Tier II and Tier III technical and help desk support work, which is more complex requiring longer training periods and higher skilled employees.

Another trend that continues to benefit our business has been the move by the Global 1000 to actively consolidate to fewer and more financially stable and capable BPO providers. Of the business we won during the first six months of 2008, we estimate that more than one-third has come from this client-based consolidation initiative, and we're confident this trend will continue into the future.

Economic cycles such as this one separate the strong BPO providers from the weak and allow us to continue to capture marketshare given our centralized global delivery model, our innovative high-quality solution and our expansive offshore footprint. We believe our balance sheet is one of the strongest in the industry with more than $98 million in cash, a debt-to-equity ratio of just 16% and positive free cash flow. These metrics give us staying power to both grow and invest in our business for the long-term.

As we have discussed before, our ability to meet our goal is dependent upon the pace of new business ramps relative to underlying trends in our existing client base and how these clients might be impacted by a weaker economy.

After 10 consecutive quarters of double-digit growth, during the month of June certain clients reduced their volumes due to their own business slowing. Historically the beginning of the summer season is correlated with some volume softness, and we did not immediately reduce our work force requirements until we determined that these lower volumes would continue with these particular clients.

In addition, while many of our clients or weathering this period just fine, certain clients are more cautious about required volumes for the upcoming holiday season. Given the long nature of these client relationships, we will continue to accommodate their business needs through this period.

Let me assure you that the volume softness is not pervasive, but rather isolated to a handful of clients.

Finally, several of our clients in the US, UK, Spain and Australia have elected to take advantage of our global footprint and move more aggressively to migrate their onshore work with us to lower-cost offshore locations. This migration typically results in lower overall revenue per workstation but improves profitability over the longer term once fully ramped.

The combination of these factors has caused us to temporarily moderate our revenue growth rates for 2008. We now believe revenue will grow a minimum of 6% to 8% over 2007. We believe we have a high degree of visibility into this revised outlook.

For this reason over the longer term, we believe we can return to double-digit growth rates given the strong sales pipeline today and our ability to sell through the temporary weakness with certain embedded based clients. This moderated guidance reduces our revenue estimates by approximately $80 million from midpoint to midpoint of our original and revised guidance. Of this amount, approximately $30 million is attributable to the loss of revenue from the sale of Newgen in India in 2007. The slower ramp of new business wins is making it more difficult to complete the offset of this decline in 2008.

The $50 million balance represents the combination of the move of certain clients to offshore locations, along with certain client softened volumes. We believe this moderated guidance should be kept in perspective given that we're still growing year-over-year, our profitability is improving, and we're generating meaningful cash flow in a difficult economic environment. While we're seeing new business opportunities that could change our growth scenario over the short-term, we do not believe it is prudent to factor this into our expectations until they are closed.

We also believe 2008 operating margin, excluding asset impairment restructuring and restatement-related charges, range between 9% and 10%. This revised margin outlook is due in part to the temporary higher cost associated with the transition of certain client programs to offshore delivery locations and increased wage pressure.

The rapid and unprecedented increase in food, energy and transportation costs around the global are making wage management difficult in the short-term. While many of our larger contracts have annual cost of living increases, there is a lag effect as to when they are realized. Given many of them are tied to contract anniversary dates or the renewal process, our clients are experiencing the same issues and in many cases are working with us to mitigate them as soon as possible.

While these revised estimates are below the goals we had entering into 2008, we believe they are consistent with and reflect the pressure that certain clients are facing. The silver lining is in this moderated outlook that the economic weakness is a temporary phenomenon. We believe these clients will again enjoy renewed growth, and we will ultimately benefit from that when their volumes return to more normal levels.

We're actively managing through this period by successfully investing in new sales leadership to accelerate the growth of new client logos. We're vigorously pursuing price increases with our clients. We're continuing to migrate underperforming business out of our portfolio. We're seeking additional economic incentives from various government entities, the benefits of which we are already starting to recognize in certain countries. We are aggressively executing additional profit improvement initiatives and lowering our full-year capital expenditure estimates by $10 million to approximately $60 million.

We have built a long-term sustainable global business, and we continue to raise the bar for ourselves and for our industry despite the challenging global economic environment. As one of the most financially stable BPO providers who can successfully scale large complex outsource solutions on a global basis, we are uniquely positioned to capture marketshare.

Right now we're seeing the field of qualified providers narrow significantly, while we win business from companies who are consolidating their outsourced work.

In addition, we're seeing the outsourcing trend that began in the US further expanding as it is being adopted by businesses around the globe. Companies in countries which have historically preferred to remain onshore are now not only embracing outsourcing but are moving more aggressively to offshoring outsourcing models. We continue to capitalize on the Global 1000s flight to quality capability, financial stability, performance and geographic reach.

In summary, we're very confident in our industry position and the long-term prospects for our business. Economic cycles such as this one have historically separated the strong BPO providers from the weak. We believe we have a reputation for solid execution and the most seasoned management team in the industry. In addition, we have a healthy balance sheet with low debt-to-equity ratio, the ability to continue to fund our growth. Within our industry and relative to our size, we believe we have one of the fastest growth rates, the highest profitability and the best return on invested capital.

Let me reemphasize that absolutely nothing has changed about our belief in the future prospects of our business. We continue to believe that over the longer term we can return to double-digit growth rates, while continuing to track to an operating margin goal of 12% to 14%. This strong belief in our business and industry position has led our Board to increase the funding for our share repurchase program up to $100 million. We plan to resume our share repurchase program this quarter given the belief that our stock is significantly undervalued relative to our current performance and future growth prospects and industry position.

I would like to remind you, however, that we're currently in a blackout period and will be unable to repurchase stock until we have released our second-quarter earnings. We plan to release those results during the first week in August.

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

(OPERATOR INSTRUCTIONS). Josh Vogel.

Sidoti & Co. Ken, with regard to the inflationary cost trends, is this really broad-based globally, or are you seeing it more specifically in one or two markets maybe like the Philippines or Latin America?

You know, I would say that it is pretty much broad-based globally. Food prices and energy prices are being affected on a global basis, and I don't think any country is immune to them.

Okay. Are your clients being at all receptive to pricing increases?

Absolutely. As a matter-of-fact, last night we just received a significant price increase from a major client of ours, and we have a whole team of people that are working on this as proactively and as fast as possible, and the receptivity has been very positive. Our clients are experiencing this themselves and realize that they cannot ignore the fact that if the front line is incurring higher personal cost, that that eventually translates through to the fact that they are going to need to ultimately make more money.

In some cases the government is actually taking care of it. So, in countries like Spain and in countries like Argentina, they are mandating wage increases, and we're passing those mandates through to our clients.

In other countries where you don't have as much of an organized labor environment, it is a bit more location-sensitive, etc. So it is nothing that is spiraling out of control. It is nothing that is -- you know, that is a significant problem, and it is something that we think that we can properly manage through. But I think you cannot ignore the fact that food prices have gone up in 12 months 60% to 80%. Oil has gone up the last I checked close to 90% for the year. That excludes what it went up the year before. So naturally this is increasing -- this is creating pressure on our frontline.

And shifting gears a little bit. If you exclude any of the onetime stuff, it looks like your international segment underperformed a little bit in Qs 4 and 1. It looked like you guys posted losses of about $1 million and operating income if I am looking at the right. I was curious what was driving these losses?

Relative to that performance, a couple of things. I mean, one a bit of seasonality in some of the business in our international locations in the fourth quarter, as well as then the migration of work that we're doing for several of the clients in our international regions to some of the offshore locations, which is also impacting in the short-term the profitability. In the long-term, when we do those migrations, it improves our profitability, but as we do the transition, bringing up the new workforce while bringing down the existing one in in-country, there is a duplicative cost effect.

Okay. It looks like your business is growing sequentially with Sprint, and it looks like they are having some issues with subscriber growth lately. I was wondering if some of the clients that you are discussing in your business outlook, if that included Sprint?

No, Sprint is really on track for the budget that we came out with earlier in the year.

Okay. And with the talks out there about SK Telecom, to acquire them, how do you think this could affect your relationship with Sprint, and are you doing any work for SK currently?

No, we're not doing any work for SK, and it is impossible for me to comment on something that I really have no knowledge of or that is going on inside of a company.

What I would just tell you is that historically our track record is that whenever companies go through consolidation, we tend to be the winner. In the health care industry, we have seen it; in the banking industry, we have seen it -- and intend to take their strongest providers, and those are the providers that end up with more business. So we're not concerned about any potential rumors of any particular companies that might be interested in doing something of a strategic nature with that particular client.

The only other thing I would tell you about that sequential growth that you're seeing is again because some of the other clients in some of the other verticals like retail and others that have the seasonal pop for us in the fourth quarter, Sprint continues on at the levels that it has been, and it becomes a bigger percentage after we lose our seasonal work.

Right. Okay. And just lastly, did you say that the total onetime charges you expected for the audit and legal fees were going to be $21.5 million?

Yes.

Yes.

Okay. So it is about $5 million for Q2?

Between Q2 and Q3, the bulk of that in Q2, obviously with this now -- (multiple speakers)

I meant Q2 '08.

Q2 '08 and a little bit in Q3.

Bob Evans.

Craig-Hallum Capital. First, stock comp for the year, how should we view stock comp for '08?

For '08 Stock comp, it will run pretty similar to what it did in '07, which is about $13 million.

Okay. And if we look at Q4 of '07, one thing that I noted I guess was that the gross margin was lower than I thought. It seemed to have dipped down a couple of hundred basis points we covered nicely in Q1. Is there some onetime things going on there, or could you elaborate in terms of why gross margin may have been down?

Sure. In terms of the operating margin being down in the first quarter, some of that -- (multiple speakers)

Fourth quarter of '07.

For fourth quarter. Some of that is being driven by just the sheer ramp volume that occurred in the fourth quarter. We layered on close to $40 million of incremental revenue. As we talked about before, depending on how we build for the training and the ramp costs to our clients determines if we have in-period recognition of expense or not.

In the case of the fourth quarter, we had some rather large clients that we did take that expense during the quarter. And so what you're seeing and again the pop in the first quarter reflects the fact that now with that behind us, we get that revenue right.

Okay. Ken, can you elaborate in terms of -- I know you cannot be company-specific -- but you could give us a sense of verticals where maybe you were seeing some of the lower volumes, and maybe you could give us some sense of verticals where maybe you are seeing continued strength?

You know, I would say predominately where we are seeing lower volumes with certain clients is in retail, in health care where there is some subscriber attrition, and in some cases in hospitality. I would say we're seeing considerable strength in communication and media, which would cover the wireless base, the high-speed online space, the fixed telephony space, and the satellite and cable space. All of those areas for the most part are growing and are doing quite well.

We are also seeing growth in financial services. It is no secret that the financial service institutions are experiencing some pretty significant difficulties, and so there is a significant amount of outsourcing opportunities throughout the whole financial service industry, several of which are quite large.

Okay. And Q3 is typically a decent signing period for you in terms of new business. How was that shaping up thus far?

We're very bullish on Q3 and on the signings that we believe that we will get done, and we see no reason for it not to meet or exceed our internal forecast. And so we're working on a number of deals, some of which will close within probably the next three weeks that range in the 500 to 2000 workstation range. And so we're feeling very good about third quarter.

Okay. So to clarify the weakness in revenue that you're seeing, it is not a demand or macro issue per se as much as more timing-related as it relates to your ramp. I know you're seeing volume declines, but overall net net you think that the pipeline of demand continues to be strong?

Definitely. It is really -- it is pretty simple. You have got approximately five, six clients that are quite large and then a few smaller cats and dogs that their volumes are off due to the fact that they are very tied to consumers purchasing their product, etc. Those volumes drop precipitously really starting in, like, the first week and second week of June.

What is interesting is we had a client where the volumes appeared to drop precipitously. We went back to them, they told us they were reforecasting, and then asked us to make some changes to the staff downward. We attempt -- started to make those changes downward, and at last week they came back to us and told us to put everything on hold because the volumes are now coming in significantly higher than what they estimated.

So we are -- we're only as good as the forecasting information that we have from historicals, as well as the revised forecast that our clients give us. Most of our clients give us a 90-day forecast, and then we try to get them to update them every 30 days. We do not always get that update. And so usually there is a fair amount of consistency within that, and within some of these sectors, we have seen some softness in their volumes. And that is what has really created approximately $30 million of revenue that we have taken out of our embedded base on a temporary basis.

Final question. The operating margins, can you -- I don't know if this is a question for John or for Ken -- but can you ballpark give us a sense of the higher food, energy costs that is creating some of the margin and pressure? How much is that reflected in your guidance? I'm just wondering is that a 50 basis point impact, 30 basis point impact to your overall operating margin? I'm just trying to get a sense of magnitude.

You know, that is really hard to do. I'm not sure that we can give you the pinpoint accuracy on it. What I would just simply tell you is that we are being cautious and we're being cognizant of the fact that we're seeing things that have not taken place at least in my business career of this type of inflation in these core staple areas. We believe that it's just a matter of time until that passes through. And so what we're trying to do is be proactive, be on top of it and get our clients to understand that this is going to impact them, and they are seeing the same thing. And so by us getting ahead of it, we can mitigate it from being a real problem.

So right now it is very hard for us to quantify other than that yes, we are seeing certain costs that are increasing like our utility costs right now. And the good news is that it will ultimately all true up as we get to our COLA. The bad news is that between now and the time that we get to our COLAs, if we do not get a price increase prior to, then that is, in fact, what would affect margin, which is why we decided to moderate our margin guidance for the short-term.

Bob, the only other thing I would tell you and obviously everybody on the call, is just relative to the forecast that is driving the guidance, we do a monthly forecast where we look at things that are going on around the world. We factor into it what we know at the time and what we think of the future relative to cost structures and the like.

So again, what you're seeing in our guidance on the operating margin is a reflection of what we believe cost structures are doing, as well as some of the other things that we've talked about which is the movement of clients from the current in-country operations to offshore and the like. So there is a lot of interplay with a number of different factors on that.

Tobey Sommer.

SunTrust Robinson-Humphrey. I just want to dovetail, start out on one of the last questions. You said you typically look for kind of a 90-day forecast, try to get that from your customers. I'm just curious as to what extent you were able to accomplish that near-term here, get an update from just about all your large customers as part of your attempt at guidance.

All customers contractually have to provide us with a 90-day forecast, and the majority of them have to also contractually provide us with a monthly update to the 90-day, the rolling 90-day forecast. So for the most part, we get that with the majority of all of our clients. There is not an issue of us seeing that. And then, of course, we are providing actual feedback based on arrival patterns, based on products that they are launching, etc.

So I don't know if I'm answering your question, but we've got pretty good visibility the majority of the time. The problem is that within a 30-day segment, if their volume softens, then they just adjust it to the next 30-day segment.

That is helpful. Thank you. A question for you about the acceleration of migration to offshore. To what extent could you maybe comment on the drivers of that? Is it economic sensitivity in cost savings, or is it just greater acceptance of outsourcing generally, and they are comfortable enough to send it to offshore locations?

I think it is a combination. I think that the last probably 18 to 24 months, it has really been a real focus on quality and on driving a customer experience. I think that now that all these global companies are experiencing significant increases in their own costs, I think that now what is happening is we are seeing a lot of opportunities that are coming out of the woodwork that typically we have not even targeted of companies that are basically saying, we need to talk to you about our entire backoffice, how quickly could you take this function over, can you do finance and accounting for us, can you do this different functions, etc.? And that is tied to the fact that their own fuel prices are going up. They are in a business that is maybe very driven off of transportation costs, and they need to offset those costs. And hence what they are saying is, they can no longer do this a) internally, and b), it most likely cannot be done in an onshore environment.

So I think that there is a significant catalyst. Because what is different about this type of an economic cycle that we're in over others -- not that we have not had something similar -- is that you have a slowdown coupled with inflation. And when you have both those things happening and you have got the Global 1000 wanting to try to maintain some semblance of profitability, they are going to do everything they can to find ways to have a significant impact on their costs so that they can offset the inflationary aspects of their business.

And I would say that that has been a real driver. It is giving us the confidence for second quarter being from a signing standpoint where we expected it. And it is giving us confidence to believe based on the deals that we're currently negotiating in legal, that third quarter is going to be a significant quarter of signings.

Thank you very much. That is helpful. Just the last question and I will get in the queue. Do you consider the offshore work even stickier than domestic work?

And then maybe if you could comment on your plans -- I think last time we heard from you in a conference call, you were thinking about expanding in another country or two this year. Any kind of comment or update you could give us on that would be great as well.

You know, we have traditionally had a very sticky customer base. A lot of that is tied to the type of capabilities we have, some of the technology offerings that we offer, etc. So the majority of our clients have been with us, five, 10, 12, 14 years. And so I would just say that regardless of whether they are onshore or offshore, they have been sticky, and we're very appreciative of that.

I don't necessarily think that one is related to the other as it relates to stickiness. I think at the end of the day as companies outsource more of these types of competencies that they have and as they focus more on their core business, the relationships become more sticky just in nature just tied to the fact of how strategic can we be with them, how can we help them really impact their business beyond just cost savings but really in the area of how can we help them grow their business, how can we help them retain their customers longer, etc. And if we can demonstrate that empirically to them, our relationships tend to be very long-term in nature and very sticky. And that is why we typically go into all years with very high revenue visibility.

Because we are not having to constantly go out and get new business. Instead we're focused on growing the embedded base.

(multiple speakers) Now as for expanding into another country -- thank you -- as you know, we have expanded into South Africa. We're very comfortable that we're a couple of months away from being sold out in South Africa with that capacity based on current deals that are now being negotiated. And we are looking at one other country that I really am still not at liberty to discuss that we are in very advanced stages on to expand to that we have completed all of our government negotiations and have located our buildings, etc. And really this is just all part of making sure that we have adequate amounts of labor, that are at costs that are competitive, and that our strategy is diversified. And rather than doing what some believe is the strategy, which is to put all eggs in one or two baskets, we believe that we need to have a dispersed labor force, and we believe that our clients need to blend their solution with us by balancing their traffic, they can mitigate political and environmental risk.

Craig Smith.

Merrill Lynch. You guys as far as moving work offshore from existing customers, is there any way to quantify how much is vulnerable to that and what the impact could be on revenues and operating profit?

I think that on an annual basis, it has been averaging about 25 to $30 million a year. I would not be surprised if this year it accelerates a little bit. What I would tell you is that if that does happen, we view that as a positive, not a negative. It is very difficult to make a fair profit in Canada or in the United States. And so -- but if you're asking me do we see a tsunami of business that is asking to be picked up and moved over and above what we normally see, at this point in time we don't. What we have seen is an acceleration of it where people maybe had plans to do some of this in fourth quarter, and they are saying, no, we want to do it right now. Let's get it over with, and that is that.

Okay. Then just on your goal of the 12% to 14% operating margin, I think you had previously talked about a $2 billion revenue run-rate. Any timing you can put around those goals at this point?

I don't think so, other than that I think that our goal is to get to the $2 billion run-rate sometime in the next several years, probably in the 2011 timeframe, maybe possibly a little bit slightly earlier than that. And I think as it relates to our longer-term goals, what we're basically saying is that we were tracking all of our goals pretty much through the first quarter to continue to achieve significantly higher margins going into the rest of the year and into 2009. And we just think that for a couple of quarters, while the ramps offset the depleted volumes, that is going to have an impact, as well as while we sort through some of these pricing increases.

And so we don't think that anyone should look at our business medium-term or long-term any differently than they did two quarters ago or a quarter ago. We think we just need to get through a quarter or two or three, and then we should be back on track.

Okay. And then just lastly, now that you are current with your financials, was that holding you back as far as customer relationships or new business in any way? So is that going to release any pressure? It does not sound like it given the quantity of new business signed, but any thought there?

Well, I think that the good news is that our operations in human capital and sales have been totally unaffected by the overall review and restatement process.

That said, clearly it was a distraction. There was an intense amount of management energy put into this, and therefore, some of the departments, the rest of the Company did not have as much access to them as they historically would like financing, accounting, legal, etc., etc.

And so what I would just simply say to you is that business is normal from today on and we are all very relieved, and I would view that as a positive that we believe that there's no reason for us to do anything but look forward and take advantage of the opportunities that are in front of us.

Matt McCormack.

FBR Capital Markets. In terms of the large deals that the ramp up has been delayed somewhat, could you just give us a little bit more detail on what is going on there? If it is just these are deals that are just larger than you have normally done? Is it on your side? Is it on the client's side?

And then you also talked about trouble finding labor for those deals, and can you just talk about what geographies you're seeing that issue in?

Yes. First of all, let me clarify, the deals are ramping as scheduled, meaning that their ramp is starting on-time. So we are not seeing deals that we have won, and then the clients are saying hurry up and slow down. Instead we're seeing that the clients are asking us to go ahead.

That said, a lot of the business we are going after what used to be a typically three-week education requirement is now turning into six to eight weeks. And so consequently it is doubling the length of time to get people educated and then get them into their workstation in a revenue producing mode. So that itself is elongating the launch.

Secondly, because the projects are larger in nature and because clients are asking us to launch in multiple countries, that is also elongating as well. And so -- it is not that they are being delayed, they are just been elongated in the amount of time that it takes to source employees, train the employees and then ramp the employees.

I think the other part of the question was related to difficulty in finding employees. We're not experiencing difficulty in finding employees. As a matter-of-fact, I would say that that is our core strength of being able to attract and draw talent acquisition group. So that is not a real overall concern of ours.

We just simply always try to be proactive and think out about our labor two to three years ahead of time so that we are not in a situation where there is not adequate labor when we need it.

Okay. Then in terms of just the pricing environment in general, I know you talked about COLA adjustments and the like, but can you talk about your ability to raise prices as clients do renew? And then also how has the pricing been for new business?

I think relative to pricing, we're actually again seeing stabilization, a realization on the part of our clients that there are some cost changes that have occurred out there. And so we are working with our clients on that. And so we do not see that there is any pressure on the downside relative to price.

Tom Smith.

First Analysis. A couple of questions. (technical difficulty)--

You are cutting out. We cannot hear you.

(technical difficulty)-- sorry. I just wondered if you could quantify (technical difficulty)-- a couple of wage (technical difficulty)--

You know, Tom, you are still cutting out.

We just heard something about wage. That was it.

Okay, sorry about that. Can you hear me better?

Right now I can.

Okay, great. I was just wondering if you could quantify what level of wage inflation you have seen?

You know, in certain markets we have seen 6%. In other markets we have seen flat. In places like Argentina, it has been higher. But like you say, we are very successfully passing that through to our clients, and they are very much understanding it.

Okay. Can you say what percent of your contracts have the COLA agreements that you are --?

The majority of our contracts have COLA, and the ones that do not have an option to negotiate COLA, meaning that it is not automatic every year. So we do not take on business period if there's not some form of a way for us to adjust for cost of living, etc.

Okay. And then just on your revenue outlook, looking at the reduction that you have, you said from the midpoint to midpoint it was $80 million. Can you say again what was -- how did that break out? Was it $30 million because of the transition to offshore and then $50 million from the lower volumes? Is that accurate?

No, what we said is that we have $30 million year over year that went away as a result of the sale of Newgen in India that we had intended to grow through. So because of some of the elongated ramps that Ken has talked about, that is proving to be a little more difficult. Of the remaining $50 million, that splits about 50-50 between the move to offshore locations, thereby reducing the revenue, and then another $25 million or half of that 50 related to softening of volumes in a handful of clients.

Okay. And then on your update to the margins, I just want to be clear on the expectations. You are saying 9% to 10% for '08, and are you comparing that to that 8.5%, excluding all the charges even with restatement? So you're looking at 50 to 150 basis of improvement from the 200 before?

Yes.

Okay. And can you comment at all on your expectations for '09? In the past you had said I think 100 basis points improvement was possible over '08 levels. Is that still a goal?

That is certainly still our goal, but at this point we've put out temporary short-term guidance, and we will obviously update as we have more information available to us.

Okay, great.

Ashwin Shirvaikar.

The new contracts that you're assigning, do they contain provisions that account for the inflation we have already seen in our clients (inaudible)?

Can you just explain to me your question one more time? I'm sorry.

Sure. The new contracts that you are signing as you (technical difficulty)--

Hello? You are kind of going in and out. I think if I understand your question correctly, all contracts that we are signing today, all are priced with a COLA in them, and all of them have an annual anniversary date that is tied to the local market that we're providing the service in, as well as we are now adding into our -- the majority of our contracts we're attempting to add into currency collars as well.

Okay. So in terms of taking into account the inflation that we already had -- (multiple speakers)

That has already been priced in.

That has already been priced in?

Yes, we're not pricing any deals that are not going to meet or exceed our margin threshold on a go forward, and our costs are updated every 30 days to our models. So that way we are always using fresh pricing based on fresh data, etc. And if one does not do that, then there would be no way that you could maintain profitability.

Okay. And just to confirm the delayed ramps, it is not -- it is primarily the higher complexity and what you talked about, sourcing, training and so on? It has nothing to do with client deferrals on the starts?

No, it is not. It is not -- we're not seeing client deferrals on ramps, maybe on a rare occasion where our clients technology is not yet available. That is so you're delayed by two weeks or something, while you are waiting for circuits to be connected or certain databases to be formatted. But that is said. So no, we're not seeing that, and we do not expect that that is in the foreseeable future.

Are you changing your processes to deal with the increased complexity to make it more efficient?

Absolutely. We're doing several things. One, whenever possible we're encouraging our clients to allow our e-learning and education group to rewrite the entire training curriculum rather than using the clients' training curriculum so that we can compress the training, which then will allow us to launch and ramp at a faster rate. That is one thing.

That usually takes a lot of time and energy as it relates to the client agreeing to allowing us to do that. And then, of course, we are making sure that our talent group that is out searching for people is way ahead of our hiring requirements so that we have people in the funnel ready to hire so that that does not delay in any way, shape or form.

So yes, we're doing everything we can to compress that time, and that is part of our normal course and normal kind of Six Sigma processes that we apply across the globe.

Okay. Can you talk about the difference in profitability offshore versus on-site? Because you do have the higher profitability that at some point in time should come through from the transition to offshore. How do you think about that?

Right. So we are about 45% of our revenues now are offshore today, and our goal is to get them to 50% this year. There is a possibility with some of the acceleration that that 50% could maybe even go higher. We view that as a definite positive. And yes, it is safe to say that we're more profitable in offshore than we are onshore. Therefore, the more mix that we can push offshore, that is where we have been expecting our margin lift. And that is obviously a positive for us.

Okay. A couple more questions. One is volume-based collars. Do your contracts have volume-based collars that protect you to some extent?

They do. They do. However, many of the collars are at 80% or 90%. So what that means is that if their volumes drop and they are at 90%, then they are only taking responsibility for the 90 and the 10 we have to reduce the staff on. So -- and we have several -- many that are at 100%, and we're moving more to that model. But what I would just say is that they range anywhere from 80% to 100%.

Okay. Got it. Because when you said the volume on a couple of clients dropped precipitously, I was not sure what that meant. What it meant was maybe down (inaudible) % on volumes on a few clients?

Yes (multiple speakers) we're not seeing any clients with volumes that are off by 25% or anything like that.

And I think maybe just a point of clarification. I mean the collars are based on the current forecast. So to the extent they are bringing their forecast down, we're getting 90% of the current forecast. We do not have annual volume collars or extended length volume collars.

Right. One last question. 2Q second-quarter 2008, you do expect to file that on time, right?

Correct.

So you basically start your buyback, let's just say August 10 or something like that if you wanted?

Or sooner. We will definitely be filing on time. As far as we are concerned, we're now current, and it is now -- this is sad business as usual.

Dhruv Chopra.

Morgan Stanley. Ken, can you just talk about what is happening with your (inaudible) headcount plans given sort of this recent trend (inaudible)?

Okay, I'm sorry. We are having a problem with the speakerphone, so excuse the delay as we are --.

So the question is, what is happening with our workstation and headcount plans?

Yes.

We are executing on our plans to add workstations. We try to be just in time as possible. And so we will moderate in markets as we see needed, but I would say it is business as usual. And we brought CapEx down by $10 million just because we felt that through efficiencies of just in time, we could achieve $10 million in reduction in our CapEx number.

As for our headcount, we are actively hiring across the globe in some markets more than other markets, and there is no change in really anything that we're doing.

In this move offshore, I meant is Philippines still sort of the primary destination, or are you seeing a lot more demand for a lot of your other locations?

We are seeing a lot of demand for other locations for sure. Latin America, South Africa, etc. So we are seeing it all over the place, and we're recommending to our clients that when they want to go to the Philippines, that they consider multiple locations.

Okay. And then, John, just if you could help me think about this. At what point in this migration offshore do you get to the point where the duplicate costs that you are incurring today start to decline?

You know, again given the eight to 10 week type training schedule we're seeing on a lot of the programs, I mean as those specific programs move, it could be a quarter's worth of duplicative cost, if not several as we move those programs over time.

So again, it is an ongoing phenomenon, so it's not like I can tell you it is going to stop in the third quarter. We will continue to see it. But I mean for any given program, we could have like I said a quarter's worth of duplicative cost as we move it.

Got it. Thank you.

Shlomo Rosenbaum.

Stifel Nicolaus. I just wanted to get straight exactly what we were talking about in terms of the different, the three different reasons for the lower revenues. You set about $25 million from lower volumes, about another $25 million from migrating quicker offshore, and the balance seems to be the slower ramp-ups. And just if you take the top-end, the 15% prior guidance, you know the most optimistic and then the most pessimistic of the current guidance of [60%], it comes out to about, say, $125 million and then subtract the $50 million. So is it right to assume about potentially $75 million in revenue not appearing from just the elongated ramp-outs? Am I thinking about that correctly?

No, I would say most of that is directional. I mean it is not an exact science, all those numbers. So we're saying directionally, if you kind of take the midpoint, which is what most people do, it is roughly that range. I meant there is a little bit of variability in each of the information that we've provided, but I would not read more into that what we were trying to articulate to help people understand the revenue delta.

Okay. In terms of the ramp-ups, can you just -- what exactly -- I understand that there's more complexity in the deals. Was that in terms of the training and so on, was that just the primary issue of ramping up that amount of complexity? You guys just had not accounted for how long it was going to take to get everybody up to speed? I mean is that pretty much what it is on that part of it?

I think it is more the mix of the business that we are winning. So, as you move to more complex business, there tends to be a higher amount of education, free education that is required before the specialists can do their job whether it be backoffice and nonvoice or whether it be voice. So I think it is really a combination of that. Sometimes your systems that have to be customized, etc.

So it is not anything that one can per se fully predict as to whether or not when you're projecting your blue sky, you are going to be bringing in -- the predominance of your business is going to be simpler business that ramps at a much faster pace.

The other thing, as Ken mentioned earlier, we have got many of these deals going into multiple countries. A lot of the ramp timing is dictated by the clients, and what we are seeing a lot of them do, especially on the more complex program, is grow old and stabilize, then grow again, old and stabilize. So they want this period of time where after adding 250 or 300 workstations worth of work in several countries, that they let that stabilize, see how it is performing, and then we grow again from there and step it up.

Okay. So there's a few other things that are going on as well just in terms of the visibility because the clients sort of on the more complex deals seems to want to take it in more of an incremental step is what it sounds like.

Correct.

Okay. Do you have seat expectations for the year? I know you talked about the just in time, but is there any change? Can you just update us in the new seats you expect to add this year?

Not really. I think that right now for now we're still looking at roughly the same amount of seats. As to whether more of them come on in fourth quarter versus third quarter, that will all be determined based on the deals that are getting signed right now in third quarter.

Okay. And for the second half of '07 when you had legal and audit costs, I think you said it was $11.5 million. Can you break that up into the specific quarters -- 3Q, 4Q?

Yes, 3Q was $100,000 and fourth quarter was 11.4.

Okay. Are there any quantitative metrics you guys can give about your pipeline and how that compares to last quarter and how it compares to a year ago?

Not right at this moment. You caught me a little offguard, but maybe we can take that up off-line after we do a little checking and a little research.

I think what we're saying is, we will give an update on that equivalent number that we have done, you know, the $100 million roughly over the last several quarters. We will likely give an update on that equivalent number when we release second quarter if that is what you're asking.

Well, that is a bookings number. I'm asking like the pipeline number to see if there's any like -- is there a bottleneck and you're just going to all flow out. Is that an expectation? I'm just trying to get some quantitative color on it.

Yes. We have never communicated our pipeline. We view that as proprietary, and we would just tell you that our pipeline is adequate to meet our business goals at this point in time.

Eric Boyer.

Wachovia. Can you talk about the pace of the underperforming revenue that you're voluntarily letting role off, and does this pick up at all, and when this process is likely to be complete?

Eric, it is John. Relative to that, again we are seeing this year as we have in prior years roughly 7% to 8% of our revenue every year is what we're managing out of the business. We continue this year managing that program, and again it is our hope and belief that by the end of 2009 we will have turned over all of the clients that are most problematic.

It is an ongoing process, so there is no end the goal. It is just like you manage your portfolio, we manage our portfolio of clients on a regular basis.

Yes, but what I would say is that by the end of 2009, after you take another 8% out, there will not be 8% to take out in 2010. So we get to the end of that train. We are now more than halfway through it, and then we will get down to just the very manageable level. The more we do that and the faster we do it, the more we can control the profitability of our business. And we are absolutely on a mission that we are only going to manage -- have business that is good for our shareholders and that is a win-win for our clients.

I think that it makes sense just to continue to stick with this, and then the good news is in 2010 it will allow our organic growth to have the potential of being more robust since we will not have to be replacing as much of the business that we have intentionally taken out.

The only thing that is important to note is obviously the guidance we have given you reflects that plan.

Right, okay. So can you also talk about, when you came up with the new revenue guidance for '08, the kind of conservatism you baked in for further volume declines? And maybe your view on the factors within other verticals that may or may not make them prone to start seeing volume declines as well as we go forward here?

Yes, again in terms of the 6% to 8% and what we have looked at, we have worked closely with our largest clients where we have seen the volume softness. We have got a sense of their near-term and mid-term forecast. A lot of our clients that have some seasonal activities in the fourth quarter, we have been in touch with and discussing what they anticipate in the fourth quarter. We factored that into our guidance as well.

And so at this point, it is just an issue of continually communicating with our clients and making sure that we are staffed and our forecast reflects what is needed to meet the needs of their business.

So, as we continue down this road and the global economic environment continues to develop, how it impacts our clients will be then translated into how it impacts us.

What about the other verticals, though, as far as financial services and communications? What is kind of inherent in those verticals that as far as volumes go, why could they go down? Why would they not stay the same?

Well, we don't expect them to go down. We actually see the opposite. A), we're winning new logos in those areas, so that's a good thing because it increases the size of our embedded base. And b), things like wireless service are becoming in some ways oxygen to most humans around the world, and so the rate of growth of wireless has been astounding. The rate of growth of people changing devices has been astounding. And so we capitalize off of that.

So we don't see at this point in time any trend in slowdowns or reductions. And quite frankly, we think people will give up other things before they are going to give up at that. And consequently it is why we are not seeing at this point in time volume reductions and really any of the calm or the media area.

In the financial services area, we are seeing an increase in clients requesting us to expand their existing projects, as well as we're seeing an increase in new logo opportunities.

I guess finally, John, what should we be thinking of for a tax rate in '08?

33%.

That concludes today's presentation. Thank you for your participation. You may disconnect your lines at this time.