TTEC Holdings Inc (TTEC) 2009 Q2 法說會逐字稿

Welcome to the TeleTech Second Quarter 2009 Earnings Conference Call. I would like to remind all parties that you will be on listen-only mode until the question-and-answer session. This call is being recorded at the request of TeleTech.

I would now like to turn this call over to Karen Breen, TeleTech's Vice President of Investor Relations. Thank you, ma'am, you may begin.

Good morning and thank you for joining us on today's call. This is Karen Breen, VP of Investor Relations, and TeleTech is hosting this call today to discuss its results for the first quarter ended June 30th. Participating on today's call will be Ken Tuchman, our Chairman and CEO, and John Troka, our CFO. Yesterday, TeleTech issued a press release announcing our financial results for the second quarter and also filed our quarterly report on Form 10-Q with the SEC.

This call will reflect items discussed within that press release and Form 10-Q and TeleTech management will refer to it several times this morning. We encourage all listeners today to read our quarterly report on Form 10-Q.

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 which are based on management's current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise this information as a result of new data that may become available after this call. Forward-looking 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 several major clients, the risk associated with lower profitability or the loss of one or more significant client relationships, execution risks associated with ramping or migrating new business, and the possibility of additional asset impairment and/or restructuring charges.

For a more detailed description of these risk factors, please review our SEC filings along with our 2008 Annual Report. A replay of this conference call will be available on our website through August 13th and I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and good morning to everyone joining us today. I'd like to take a few moments to review our financial performance for the second quarter 2009 and then I will provide some commentary on the current business climate and our 2009 outlook. After that, John will discuss our second quarter financial results in more detail.

Second quarter revenue was $302 million. This compares to $357 million in the second quarter of 2008 and $304 million in the first quarter of 2009. On a constant currency basis, second quarter revenue decreased 8% from the year ago quarter. The year-over-year constant currency revenue decline was primarily attributable to the increased shift of certain North American and international client programs to offshore locations and lower client volumes due to the weak economic environment.

During the second quarter, we signed an estimated $80 million of new revenue, primarily from existing clients. This includes $21 million in revenue recognized in the second quarter from the FCC for our work associated with the digital TV transition. Within five weeks, TeleTech Government Solutions recruited, hired, and trained nearly 4,000 temporary associates to support the FCC, providing assistance with DTV converter box installation and troubleshooting support in multiple different languages.

Our quick response was enabled by the investments we've made in our cloud based global delivery platform including our highly effective automated human capital tools and methodologies. TeleTech's efforts on this program once again demonstrate our ability to successfully meet clients' short term and ongoing business needs.

We have extensive experience supporting programs of similar scale and in many instances throughout the company's history, TeleTech has responded quickly to urgent needs for large scale consumer support. For example, within one week after Hurricane Katrina, TeleTech recruited, hired and trained, and mobilized the first 4,000 representatives for FEMA to assist victims over the phone.

Our strong reputation for operational excellence in technology, innovation, continues to enable our expanded sales force to win contracts such as the FCC program and to strengthen our pipeline while fill cycles are still longer than in prior years due to the economic climate. We are seeing an increase in the number of potential clients actively engaged in discussions with us. The expansion and enhancement of our sales force continues to be our highest priority and we're continuing to actively recruit new sales leaders. We remain confident in our ability to resume our growth trend in 2010.

Turning to our operating performance, I'm pleased with the improvement we delivered in the second quarter in light of the economic environment. Excluding unusual items, second quarter operating margin was 9.9% as compared to 9.4% in the year ago quarter. This is largely a result of our continued shift to higher margin business including professional services and technology related offerings, the intra quarter lift in capacity utilization as a result of the FCC program, and the stringent cost controls we've implemented across the globe.

Earnings per share for the second quarter, excluding unusual charges, were $0.32. Our balance sheet remains strong and we are well-positioned to fund new business opportunities. At the end of the second quarter we had $84 million in cash and $51 million of net cash after subtracting outstanding debt.

We generated $40 million of free cash flow from operations for the second quarter, up from $33 million a year ago. After subtracting capital expenditures, free cash flow was $34 million for the quarter. This was nearly three times our cash flow in the year ago quarter. Our solid cash flow from operations places us in a strong position to fund our organic growth, and provides us with the flexibility to repurchase our stock and pursue select acquisitions.

During the second quarter we repurchased $24 million of stock, leaving more than $9 million available for future repurchases as of June 30th. Our return on invested capital was 28% at the end of Q2 and continues to be what we believe is one of the highest of any global infrastructure based BPO company. We continue to rationalize capacity as the global delivery needs of our business change. In the second quarter we exited approximately 1,000 workstations in Asia-Pacific and Canada. We transitioned some of the programs from these existing sites to offshore locations during off-peak hours, demonstrating our ability to increasingly leverage our facilities over a 24 hour period.

Now let me turn to the current business climate. We believe our global presence gives us a broad perspective on the effects of the economic environment. First, in terms of our existing business, we continue to experience weakness in the volumes from our consumer based programs as consumer spending remains low. Looking ahead, our clients are forecasting minimal growth in the third quarter. The trend, combined with seasonally soft summer months in Europe, leads us to believe we'll continue to experience pockets of weakness with certain clients in the coming quarter.

Furthermore, as we have previously mentioned, clients are increasingly shifting programs offshore as we continue to demonstrate our ability to deliver exceptional service from our offshore location. Second, looking at new business, despite an increase in the number of potential clients engaging in active discussions with us, we continue to experience temporarily longer sales cycles and the pace of new business continues to be slower than the historic quarters. Lastly, to mitigate the impacts of these trends, we continue to diversify our revenue stream to higher margin offerings including professional services and our suite of technology and infrastructure related services. This continues to have a positive impact on our operating performance. This business shift, combined with management's efforts across the globe to rationalize expenses, gives us confidence in our ability to continue to deliver strong operating performance despite the current global economic condition.

This leads me to our business outlook. While our 2009 revenue outlook has not changed substantially from last quarter, we now expect operating margin to be slightly higher than previously communicated. In light of the trends I just mentioned, we currently believe 2009 revenue will be adversely impacted by the following. The stronger US dollar in 2009 relative to currencies of certain foreign subsidiaries, the combined migration to offshore locations of certain domestic work currently performed in Asia-Pacific, Europe, and North America, and lower volumes with certain existing clients due to lower demand for their products and services.

Despite the revenue decline, as we continue to aggressively manage our cost structure, we believe 2009 operating margins, excluding unusual charges, will be slightly higher than our previous guidance of 7% to 8% and will fall within the range of 7.5% to 8.5%.

In conclusion, we are pleased with our performance in light of the current economic environment. We believe the actions we continue to take to standardize our delivery capabilities across an expansive global footprint, invest in industry leading technology innovation, expanding our sales force, and aligning our cost structure with current business conditions, provides us with significant operating leverage and the ability to emerge even stronger when the economy improves. Let me now turn the call over to John, after which I will make a few closing remarks. Thank you.

Thank you, Ken, and good morning to each of you who have joined us today. Let me take a few minutes this morning to provide some additional insight into our second quarter financial results, as well as highlight a few items that will impact our full year. Our second quarter revenue was $301.5 million compared to $357.4 million in the year ago quarter. This decline is attributable to several factors, as Ken touched on earlier. Approximately half of the revenue decline over the prior year quarter is the result of lower transaction volumes across many of our consumer-oriented client programs and the continued shift of existing client business from onshore to offshore locations.

The other half, approximately $27 million, is due to changes in foreign currency rates. This impact is a combination of lower currency translation rates for certain of our foreign subsidiaries and foreign currency hedge losses related to various cross currency exposures as disclosed in our Form 10-Q. As I have mentioned on previous calls, hedge gains or losses have virtually no operating margin impact given they are put in place to protect our margin at the time a contract is signed. The revenue impact of these gains or losses is offset with a corresponding increase or decrease in our cost of services, thereby neutralizing the impact to our operating profit.

In the second quarter our revenue from offshore locations was $139 million. This represented 46% of our total revenue. Our offshore delivery capacity is approximately 68% of our total capacity. As Ken mentioned, we signed an estimated $80 million in new revenue during the second quarter, predominantly from existing client relationships. This includes $21 million of revenue recognized in the second quarter by TeleTech Government Solutions related to the FCC's digital TV conversion program.

In addition, the new signings include approximately $24 million of recurring seasonal revenue that will be recognized over the next several quarters, primarily in the healthcare vertical. In spite of the challenging economic environment and its impact on our top line growth, our second quarter gross margin increased 370 basis points over the year ago quarter to 29.3%. This improvement was due primarily to the increased utilization of our global delivery platform, including the FCC program's impact on our utilization. In addition, we have seen lower workforce attrition as well as a favorable shift of revenue to more profitable products and services.

In terms of our SG&A expenses, when you exclude equity based compensation expense and the cost of the financial restatement in prior periods, our SG&A expense increased $1.8 million from the year ago quarter. As discussed on previous calls, we have increased the investment in sales professionals for specifically targeting new client wins. This additional investment, along with higher variable incentive compensation expenses, are the primary drivers of the increased cost year over year.

On a sequential basis, excluding our quarterly equity compensation expense, our SG&A declined $2.4 million. This reflects our aggressive management of overhead costs to insure alignment with current business conditions. This sequential decrease was achieved while making the additional investments I just described.

Our second quarter GAAP operating income was $23 million compared to $29.7 million in the year ago quarter. Our current period results include $6.8 million of unusual charges primarily for restructuring and impairment costs. In addition, we recorded $2.5 million of equity based compensation expense in the quarter. Our GAAP earnings per share for the second quarter were $0.25 compared to $0.28 in the year ago quarter. Excluding the unusual items just mentioned, our non-GAAP EPS in the second quarter was $0.32.

Our effective tax rate was 27% for the second quarter, up from 26% in the year ago period. The second quarter rate was higher primarily as a result of our short term program for the FCC which drove an increase in our US based taxable income at the correspondingly higher US tax rates. We expect our effective tax rate will continue to range between 25% and 30% for the remainder of 2009.

Turning now to our segments. As you may recall, we made changes to our operating segments beginning in the first quarter. These changes more closely align our external reporting with our client focus and our management accountability model. Specifically, our segments now reflect where our client contracts originate from rather than the location from which our services are being provided. Therefore, our North American BPO segment is now comprised of sales to all clients based in North America and our International BPO segment is now comprised of all sales to clients based in countries outside of North America.

As noted in our Form 10-Q, our International BPO segment generated an operating loss of approximately $5 million in the second quarter and $10 million year to date. Approximately $4 million of the year to date loss is related to restructuring and impairment costs incurred as we work to realign the cost structure of various international client programs and delivery locations.

The additional losses year over year are primarily related to our Spanish operations where local labor laws and agreements prohibit us from responding quickly to the dynamic business environment. We are working closely with our Spanish clients, local governments, and our workforce to address the issue through contract changes and more flexible labor agreements.

Focusing now on our cash flow and liquidity, we continue to generate very strong cash flow. Cash flow from operations was $39.8 million in the second quarter and free cash flow nearly tripled at $34 million. This is due to our strong working capital management and lower capital expenditures. We ended the quarter with $84 million in cash, $33 million of debt, a total debt-to-capital ratio of 7.8%, and a current ratio of 2.3 times. Our DSOs were 68 days in the second quarter, and within our targeted range of 65 to 70 days. We continue to proactively manage cash collections to further enhance our working capital and free cash flow.

Our capital expenditures decreased to $6 million from $21 million in the year ago quarter. We expect 2009 capital expenditures will range between $30 million and $40 million. The current forecast reflects our continued commitment to invest in new and innovative technologies as well as maintain and grow our global delivery platform.

Finally, in regards to the business outlook that Ken discussed earlier, our revenue is expected to decline 10% to 12% this year on a constant currency basis. As previously discussed, the decline is primarily related to two issues. First, we are experiencing lower volumes in our consumer oriented client programs, driven by the continued weak economic environment. The impact from these volume declines is expected to reduce our 2009 revenue between $80 million and $90 million.

Second is the continued migration of existing client programs from onshore to offshore locations, this expected to further reduce our revenue between $60 million and $70 million year over year. Despite these revenue declines, we now expect our annual operating margin, excluding unusual items, to be within the range of 7.5% to $8.5%. This is slightly higher than the 7% to 8% we previously communicated.

In summary, we continue to demonstrate our financial stability and have taken the necessary actions to align our operations with current business conditions. Given our strong cash flow from operations, our $84 million of cash on hand, and the $195 million of additional borrowing capacity under our credit facility, we have ample liquidity to fund our ongoing operations, quickly capitalize on growth opportunities, and continue our stock repurchase program.

With that, thank you, and let me now turn the call back over to Ken.

Thank you, John. The successful execution of our strategy to invest in technological innovation and diversify into higher margin revenue streams, has contributed to our solid performance in this tough economic environment. As we look ahead to 2010, we believe we are well positioned to deliver improved financial performance given the investments we are making in our sales teams and the significant operating leverage in our global delivery model. We look forward to updating you in the coming quarters and we will now open the call to your questions. Thank you.

(Operator Instructions). Tobey Sommer, SunTrust Robinson Humphrey.

Thank you. I wanted to ask a question about the higher margin offerings that you discussed. Wondering if you can give us some color as to what in particular is gaining traction and perhaps give us some color as to the differential in margins that you're able to generate off of those services.

Hi, Tobey. Be happy to. What -- as you know, for quite some time we've been developing a pretty significant cadre of proprietary IP. And so now what we've been going through over the last 12 months or so is we've been starting to really productize it and now offer it in a software as a service, cloud based computing type format to our clients. And so it's a combination of providing infrastructure services, our unique IP services, and professional services/consulting services. And those are really kind of the three areas as well as we're also starting to provide some human capital services in the area of [eLurking], etc. But primarily it's really around professional services, consulting and infrastructure, and our software as a service.

Thanks. I wanted to also ask you a question, to what extent could you quantify either the impact on operating income or EPS of the short term contracts with the government? And I missed -- I think you gave the number of people that you hired in a very short period of time. If you could refresh me on what that number was, that would be great.

Tobey, it's John. Yes, what we had indicated was that we hired or brought on board close to 4,000 associates to operate that program. It -- obviously $21 million of revenue, it did have an impact on our operating margin for the quarter. Obviously we're not going to discuss that specific margin, but it did increase our utilization and the like and the margin we saw is consistent with the overall gross margins of our business.

Okay. And then cash flow generation was very strong in the quarter and it seems like you were able to modulate your CapEx down substantially. The roughly $6 million you spent in the quarter, is that what we should consider kind of a maintenance CapEx level? Or is there some sort of growth associated with that number as well?

Actually there -- when you say growth, you mean is it put towards for future growth in our business?

Yes.

Yes, I mean a chunk of that has been invested in infrastructure for future projects that we're bringing on that will go live in the first quarter of 2010 and it's for growth. And then the rest is for maintenance.

Okay, thank you very much. I'll get back in the queue.

Howard Smith, First Analysis.

Yes, good morning. My first question has to do with the bookings. The $80 million, if you back out the seasonal recurring and the other, it's about $35 million and I wanted to see, does that compare with the $60 million in Q1 and $100 million in Q4? Is that the right way to look at it?

Yes, Howard, it's John. I don't think you can directly compare that because again, every quarter we have programs that may be seasonal in nature or short term. We haven't specifically broken it out in that level of detail, so I don't have what those prior quarter breakouts would be. We'd have to get back to you on that.

Okay. And then just as far as the new contract negotiations, etc., could you discuss the competitive, in particular the pricing environments you're facing right now?

Well I would say that on the new business that we're pursuing, more than 50% of the business we're pursuing is business where we really have created the opportunity and are not responding to an RFP. And in those environments where we've kind of gone in and done the consulting and the strategic solutioning, etc., the client respects the work that we've done, etc. And I'd say overall it's a bit less competitive. And then the work that is just general work that's being put out to the marketplace that's competitive, I'd say that in many cases it comes in as that they're going to be extremely competitive in their bidding and try to turn it into price as a differentiator. And in some of the cases we're successful in demonstrating that we have a lot more to offer than just labor augmentation. In those cases we maintain our pricing disciplines and hold them and have no issue of attaining the pricing that we require. And in the cases where we're not successful in demonstrating that differentiation, we walk away from the business. So we're not participating in overly competitive pricing because we don't think it's good for our shareholders or our customers or our employees.

Great. Thank you, and congratulations on the strong quarter.

Bob Evans, Craig-Hallum Capital.

Good morning and congrats on the great margins as well. And speaking of the margin side, can you give us a little bit more of your view on sustainability of the gross margins? This quarter was obviously strong. What's your view of margins going forward?

Bob, it's John. Yes, I mean we expect that our gross margins will continue to be strong. Obviously there was the impact of the short term program we had with the government this quarter, but again, we are being very aggressive, as we should, in managing the workforce to the workload. And that's key to maintaining those margins. So will they be above 29% again going forward? I can't tell you that they will, but they definitely will be up in that range.

Can you give us a little greater thought in terms of utilization, where utilization is at now, where you think you can get utilization, and what kind of margin impact that might be?

We've talked about utilization before and the impact it has. I mean if you look at the 10-Q you see that it's actually looks like, or it is, down slightly. The thing I would point out again about that utilization number is it is a point in time. I mean we put 4,000 people on the phone during the quarter. You don't see it in the end of quarter number because the program occurred June 12 and quickly ramped down from there forward. So having the excess capacity that we do is actually a good thing. It's what enables us to respond quickly to those type of programs. Again, we believe that we can operate the business at or around 80% utilization.

The other thing we're doing on our capacity to make sure our utilization remains strong is, again, as we see this offshore migration, we are definitely closing capacity behind the migration. The great news is a lot of this stuff is going into existing facilities so we're not having to invest new capital. So we're getting improved 24 hour utilization. It doesn't necessarily mean our actual seat percentage utilization is going up. And so what we're more focused on is that 24 hour seat utilization which again will have the bigger margin impact. As we've talked about before, we started out at a point of being about 1.0 to 1.1 seat turns a day. We have improved that to, on a global basis, about 1.3 to 1.4. In some locations like the Philippines where again we've got programs from all over the world going there, we're seeing seat utilizations up to 2 and 2+% in certain facilities.

Two times.

Two times, excuse me.

And, Bob, I guess the only thing I would add on to John's comments is that overall our workstation utilization is clearly lower than we'd like to see it. That would be the bad news story. The good news story is that our operating leverage that takes place as we infill all of the capacity is pretty significant. And so we're very comfortable that we are well positioned with the right workforce in the right countries and the right infrastructure in the right countries, and our sales force is working feverishly to continue to infill that business, excuse me, that available capacity. And so I think that if that helps your question as to what do the long range margins look like, we believe that we have very, very significant operating leverage by infilling that available capacity.

Okay. And last question, can you give us some sense of magnitude for kind of cost reductions and efficiencies that you've done thus far this year maybe on an annualized basis? Just wondering if you can give us a little bit more quantification there.

I think it's safe to say that we've taken out somewhere in the neighborhood of $40 million to let's just say $45 million of costs on an annualized basis. And that cost is now, that has all been done, it's all complete, and that of course is on a go-forward annualized basis.

And is that both SG&A and gross margins?

Yes, absolutely.

Okay, thank you.

Ashwin Shirvaikar, Citigroup.

Good morning. This is Nathan Roseoff on for Ashwin. First question, we wanted to drill a little bit more into the $21 million of one-time revs for this quarter. First question on that just is, will any of that revenue continue on into 3Q?

Yes, it will. A small amount. But I should just tell you that I'm not sure I would totally classify it as one-time. It's one-time for this project because there won't be another digital television conversion. You should know that when you look back over just the last 10 years, a high percentage of the years, more than 60%, there has been projects that are similar to this that we win on a yearly basis. Do they tend to necessarily hit in the second quarter? No, sometimes they're in the third, sometimes they're in the fourth. But the point is, is that just because of our relationships, etc., we're pretty well-known for doing this type of work. And we believe that we're going to continue to keep winning these types of projects.

Got it. So as we think about kind of how this work could extend forward, would it then continue at like a very low run rate, like 10% of this quarter indefinitely? Or would it just be a little bit of a tail off? Thank you.

No, it will be just tail off. So it will be some, a small amount in third quarter and then it just tails off because the program was 100% successful for the government and the conversion is pretty much essentially completed. So no.

Got it. And then when you have one time projects like this one, is the margin profile typically similar to the Company as whole or is there something different we should be aware of?

No, it's similar to the Company as a whole. I mean, as you can imagine, there's pretty significant ramp costs both up and down. So when it's all said and done, it meets our margin threshold expectations.

Got it. I wanted to turn briefly to cash flow. It was a strong cash flow quarter obviously. One thing we were wondering is, as growth returns to more normalized levels and you start having to ramp up significant numbers of new deals, will we see cash flow return to kind of lower normalized levels as well? Or is this just a new normal, these higher levels?

I'm looking at our treasurer only because the answer is that I think it's more the new normal. The reason why I say that is that A), we have a fair bit of capacity to infill. And so we clearly are not going to be in a situation where we're just going to continue to build capacity for the sake of building capacity. So we want to get to a very high capacity utilization before we start to add more capacity. And then naturally, it goes without saying that as we grow, our A/R goes up and so that has an impact and a tradeoff on cash flow as well as timing of payroll, etc. So I think it's safe to say that we believe our cash flow is going to remain strong for certainly the foreseeable future. And if for some reason it came back a little down, that would be for actually good reasons and it would just mean because there was some mega deal that we won that required some additional investments in capital.

Got it. Thank you.

Josh Vogel, Sidoti & Co.

Thank you, good morning. I just wanted to get a better sense of what the market looks like on the new client front. I was curious if the new sales associates you brought on are gaining any traction yet. I understand the sales cycle is longer than usual, but do you see the pipeline of opportunities with new clients building?

So to answer the first part of your question, yes, we are beginning to get some traction. It's still very early days because it really takes a good, solid nine months or so before we really start to see meaningful pipeline that has opportunity for conversion. But we are getting traction. We actually have had some deals that have closed from some of the new salespeople, so we think that's a very positive sign.

As for the pipeline, the pipeline is definitely filling. And it goes without saying that with the amount of uncertainty that is in the economy and with the amount of changes that the government is doing, in many ways it is creating somewhat of a catalyst for people to start to really get more serious about looking at outsourcing. And so we are seeing our pipeline grow pretty significantly and there's a big focus now to try to convert a lot of that, a lot of the business that's in the pipeline and try to hopefully see some good wins in third quarter and in fourth quarter.

So we're pleased with the pipeline. That said, we still don't feel our sales force is where it needs to be as it relates to pure size and scale across the globe. And so one of the main reasons, or one of the many reasons why we obviously had such stringent cost management is because we wanted to create air cover so that we would further invest in sales and in marketing and in our innovation of technology. And so I'm confident that over the next 12 months or so we'll have a much larger sales force.

Okay, great. Shifting gears a little bit, you talked about work force attrition being down. I was curious if this was, if you were seeing this worldwide or is this mostly offshore, in the US?

Josh, it's John. Right now we're seeing it on a global basis that attrition is down. And so it's something obviously that is driven in part by the economic environment. But more importantly we're taking actions to make sure that our employees are well engaged and committed to the business.

Okay, could you give us quick comments on the wage environment?

On the wage side, again, we're not seeing any global trend towards increasing wages. In fact it's quite the opposite. I think we're seeing wages holding steady if not declining slightly in certain markets.

I'd say the only exception to that is one particular country in Latin America and we're working closely with the government to let them understand that it's going to impact their ability to attract more industry and our ability to grow there. But otherwise, every country it's flat to potentially futuristically down.

Okay. And lastly, I know consumer spending is down, it's obviously hurting the consumer related programs. But when you're discussing with your clients the volume forecast, I was curious if you're forecasting out. How long? Is it a month, is it three months out that your clients are looking?

Our clients historically have always looked out three months with a 90 day rolling forecast. That then of course gets updated not only at the 90 day mark, but if something changes in their business in mid term of the 90 days as well. So that's typically what we see from I'd say 95% of our clients.

Yes, with that said though, what I would tell you obviously on certain client programs, especially those that are impacted by retail and what occurs during the holiday season, while they haven't given us official call volume forecasts, I mean we've had discussion with them, and it's clear that their expectation going into the latter part of this year is not the type of growth that they've seen in prior years in terms of their volumes.

Okay, thank you.

Brandon Dobell, William Blair.

Thanks. Maybe some color on the Spanish operations. I don't know if you can give us kind of a timeline or kind of how we should think about getting those issues squared away. It seems like a pretty decent drag on international profitability, so any kind of resolution would be a pretty significant benefit for you guys. Just trying to gauge how that process might work for you.

Yes, Brandon, it's John again. We are in active discussion obviously with the entities I talked about in my earlier remarks. And so we're expecting some resolution on some of these issues shortly. At the end of the day, this particular market has been up and down for us and it's important that the governments and the clients we're working with understand again the impact that some of the rules and regulations are having on the industry over there. We will monitor that situation closely. Again, we're working very diligently to get it resolved. To the extent that we're unable to resolve it, we're going to have to look at possible strategic alternatives in that marketplace.

Okay. From a modeling perspective, as we think about the new marketing guidance, should we look at the current quarter or second quarter run rate for SG&A or for cost of services as a more accurate call it go-forward run rate? Of the dollars you're spending now on SG&A, how we should think about the back half of the year. Or do you think the increase in margin guidance is mostly driven by better than expected gross margins?

In terms of the latter half on SG&A, I think what you saw in the second quarter is probably consistent with what we'll see in the second half of the year. On the gross margin side, again, we will see something close to what we saw in the second quarter, but again, don't expect it to be above the 29%.

Okay. And then final question, this is kind of related to the previous series of questions around kind of mid term adjustments on contracts and visibility. As you look over the past quarter or two, has the pace of adjustments from the customers started to slow? Has it accelerated, has it related to a particular vertical? I'm just trying to gauge that second derivative of how much visibility you have and are your customers getting more comfortable with their own internal forecasts and at some point that starts to relate back to how they're able to give you visibility on the business? Or are we still in a period where there's a lot of uncertainty and the frequency of mid term adjustments or kind of over 30 day adjustments hasn't really changed at all?

Unfortunately I think it's safe to say that the majority of the Fortune 100, or the global 100, is in a pretty cautious and uncertain mode. I think that some of them are in fact seeing some upticks in their business and they're modifying their forecasts up ever so slightly. But others are saying that they're perplexed by their own volumes and they're waiting for just more time to go by to really get a better understanding, is this a temporary pause in the American consumer or in European consumers and are they just paying down, de-leveraging and paying down some of their debt? And then will they be back in the market for a strong Christmas? And so I think that there is a fairly cautiously optimistic outlook that the worst is behind us and that that said, that their volumes have been moderated. And so we're being impacted by it.

Great. Thanks a lot. Appreciate it.

(Operator Instructions). Matt McCormack, Brigantine Advisors.

Hi, good morning. Just a kind of a follow up on the margin sustainability question. I think you said right now your capacity offshore is 68%. And that continues to go up and I'm assuming it will continue to go up as you migrate more work. So when we think about, or when you look at your current portfolio of business and then look at your pipeline, theoretically, how high do you think that could go?

Matt, just to clarify, the 68% is 68% of our total capacity is offshore. It isn't -- that's not a utilization number.

I'm sorry, I misspoke and I didn't mean capacity. So how high can your offshore capacity go? Because that obviously has a significant impact on your margins.

Again, I'm not sure I understand. I mean we obviously can grow --

Yes, no, I think I understand the question. We believe, just because of the law of numbers and the sheer scale that we have, that we could operate at 90%. Whereas historically as we were smaller, we could not operate at those levels due to the fact that we needed the headroom because we tend to be known for winning very large deals. And in order to win those deals, we have to have X amount of thousands of workstations available. But now that our workstations have grown to a fairly significant size, we believe we could get it to in the 90% range. Temporarily it could go above that, but only for a short period of time. Because if it did, it would hamper our ability to grow.

Okay. And I -- you did talk about the uncertainty with the Fortune 100. Could you just I guess compare and contrast those companies in North America versus Europe, obviously excluding your comments about Spain already. But is Europe profoundly worse or is there no difference?

I think just as an overall generalization, it's safe to say that both the EU as well as North America are pretty much in similar situations. The EU might be a month or two behind but not by a lot. And I think it's safe to say that they're very similar and so consequently they're both experiencing lower volumes.

Okay, and then just last question, you have been consistent in buying back your stock. What -- I guess just a generic competitive landscape question, is there any opportunities that are now starting to present themselves given the situation in the economy?

If by opportunities, Matt, you're referring to acquisition type opportunities, yes. And we continue to actively look and engage in dialogue with various companies. We've got our entire banking syndicate out working with us looking at opportunities in the marketplace to really again expand the product offering we have, expand some of our delivery platform in the markets maybe we're not in right now. So always looking.

Great, thank you.

Thank you, and this does conclude the TeleTech Second Quarter 2009 Earnings Conference Call. You may disconnect at this time.