TTEC Holdings Inc (TTEC) 2010 Q2 法說會逐字稿

Welcome to the TeleTech second quarter 2010 earnings conference call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being record at the request of TeleTech. I would now like to turn the 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 today. TeleTech is hosting this call to discuss its results for the second 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 its financial results for the second quarter 2010 and also filed our quarterly report on Form 10-Q with the SEC. This call will reflect items discussed within that press release on 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 would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to our operating performance, financial goals, the business outlook and future plans which are based on our current beliefs and assumption. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to he revise this information as a result of new information that may become available after the call. Forward-looking statements are subject to various risks and uncertainties and other factors that may cause our actual results to differ materially from those [outside]. Such factors include but are not limited to reliance on several major clients, the risks associated with lower profitably sums 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 impairments. and/or restructuring charges. For more detailed discussion of our risk factors please see our SEC filings along with our 2009 annual report on Form 10-K. A replay of this call will be available on our website through August 19. 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 would like to start our call by reviewing our second quarter. I'll then provide commentary on recent industry trends along with an update on some of our key strategic initiatives. After that are I will turn the call over to John so he can discuss our financial results in more detail.

Second quarter revenue was $272 million compared to $302 million in the second quarter of 2009. Our offshore revenue was $114 million for the quarter, or approximately 42% of our consolidated revenue. Since our last earnings call we've been awarded an incremental $80 million of annualized new business from both new and existing clients. We're encouraged by the increase pace of sales converse which is up from the $55 million we saw during the first four months of the year. Based on the traction we are experiencing with our expanded sales force and technology based offerings we're on track to sign a comparable amount of new business in the next three months.

Turning now to our operating performance. Our operating margin was 7% compared to 7.1% in the previous quarter and 7.6% in the year ago period. On a non-GAAP basis excluding unusual charges operating margin was 7.7% of revenue. Non-GAAP earnings per share, excluding unusual items for the second quarter, were $0.24 compared to $0.32 in the year ago quarter.

Moving to the balance sheet. We remain in an extremely strong financial position to fund our future growth requirements, to increase our share repurchase program and to explore potential M&A opportunities. We ended the quarter with $131 million in cash and $126 million of net cash after subtracting outstanding debt. We recognize that 2010 has been a transition year for all companies. As with the past economic slowdown we have taken the last 18 months to focus internally on things we can control. Additionally, we have taken this time to transform our delivery capability to be at the forefront of the next wave of growth.

Given these objectives we're encouraged that our business has stabilized despite the challenging global economic backdrop and the typical softer summer volumes in Europe. The pipeline of opportunities with existing clients is building due to our intense focus on operational excellence. We have received awards from many of our top clients this year, including Best Buy and USAA, both of whom just publicly recognized TeleTech as their top service provider.

Additionally, we're very proud of our affiliation with a major client who just received the J.D. Powers and Associates top award for superior customer service in the wireless industry. This particular client scored significantly above the industry average and rose from third place two years ago to first place this year.

We continue to manage the business with a keen focus on profitability through both strong pricing and operating discipline. While the traditional players in our industry continue to focus on labor based solutions we're taking a very different path as we continue to successfully commercialize are innovative technology offerings, and finally, our investment in sales is paying off with an increase in the pace of new business wins. All of these factors give us confidence in the underlying strength of our industry position and in the ability of our management team to deliver improved results.

Over the past several months the investment community has sought to understand the reasons behind the stalled growth in our industry. I wanted to share my perspective with you on this important topic. Foremost, I believe our business is a real-time indicator of the economy as opposed to a lagging or leading indicator. What ultimately will bring the global economy out of this recession will be an increase in consumer spending.

At this time unemployment around the world continues to be significantly higher than the reported numbers. The global housing market remains in the depths of a recession and consumer confidence is still hovering at historic lows. All of this has resulted in lower spending and, therefore, reduced volumes with our clients. This backdrop exists while at the same time the BPO industry is at an important inflection point. Major shifts are taking place in both the customer channel and technology front.

I would like to focus the rest of my remarks on the shifts in our industry and the progress we have made in expanding our sales force and discuss why they continue to strongly position us for improved top line performance. As I reflect on the last decade, it was characterized by growth primarily driven from product innovation in the US and Europe. During that time our greatest market opportunity was tied to outsourced front office solutions only. While cost optimization was driven largely by offshoring.

As we look to the next decade, we believe growth will come from the online population, Asian markets, as well as maturing US and European markets as they shift their focus to customer loyalty initiatives in order to retain, capture, and grow share. We believe cost optimization will come from outsourcing more front and back-office processes as well as some technology and cloud-based solutions replacing large highly [testimized] premise based implementation. We further believe that late adopters of outsourcing, such as the financial services and health care verticals, along with fast paced new economy companies, will increasingly leverage outsourced providers to achieve their business objectives.

Over the past year the top priority in all of the meetings I've attended with the current and prospective clients has been maximizing lifetime customer value. As a result clients are increasingly focused on being ranked number 1 in service and satisfaction. In the eyes of their customers, never before has this been so important given the changing competitive landscape and the transparency created by social media. I believe as do many of our clients that we are at the forefront of a customer revolution.

Communications over the last decade were predominantly a one way channel with companies controlling the message to their customers solely via mass advertising. That has all changed with the explosion of social media. The digital population has actively embraced the two way channel of global communication. Customers either passionately advocate for, or disparage, a company's products or services in real-time. Studies have shown that nearly 97% of consumers will research a product or service online before making purchase decisions while a staggering 82% will tell others about a bad experience. This paradigm shift has forever changed the voice of the customer.

To that end companies today are increasingly focused on their net promoter score, which is a rating of how likely their customers will recommend them to a friend or colleague. Companies are realizing that weaving social media strategies into the fabric of their existing customer management channel is critical to their future success. When a customer walks into a community, companies want them to evangelize on their behalf. Not only to utilize them as influencers in support of their brand, but also to reduce associated support costs.

Research has validated that customers trust their peers over most companies, and as a result, customers will spend more based on a peer endorsement than on a company endorsement. All of these trends play right into our strategic plan. As we increasingly focus on the expanding array of customer channels, as well as technology based capabilities, together these strategies will enable us to continue to diversify our revenue into higher growth, higher margin product opportunities, and reduce our focus on labor based solutions which strongly positions us for improved performance.

Nearly every deal we're working on today has a technology component to it, and this continues to differentiate us in the marketplace. More than five years ago we completed the move to 100% IT based global delivery infrastructure which took several years and hundreds of millions of dollars to fully implement. We had a twofold goal in doing so.

The first, was to significantly lower internal capital and operating costs. The second, was to commercialize this capability for external sales. We've successfully executed on both objectives and have won several sizeable on demands deals with numerous high profile and referencable clients. To my knowledge we have deployed the largest hosted and fully managed cloud-based solution of anyone in our industry as evidenced by the 13,000 associates utilizing our solutions -- the United States census program that's currently going on today.

Furthermore, we announced yesterday a partnership to be the front end portal and cloud-based routing engine for Salesforce.com and Cisco's Customer Interaction Cloud offering. These two industry leaders chose to works with us because we have a common vision for the next generation of cloud-based multi-channel service delivery centers functionality. Our (inaudible) and cloud-based infrastructure allows clients with a simple broadband connection to self provision, access, and rapidly deploy a complete contact center solution anywhere in the world with virtually no capital outlay. The product will jointly be marketed by TeleTech, Cisco and Salesforce.com and will significantly extend our reach beyond the large enterprise to also include small and medium businesses.

With the proliferation of social media and online communities that I discussed earlier we are also seeing a major shift in customer management channels. Once again, we're at the forefront of this trend. As demonstrated by a strategic partnership we announced two weeks ago with Lithium, a leader in the social media space. We've been developing our social media strategy over the past two years, and after working with Lithium for nearly a year I believe we've created a partnership that is the first of its kind in our industry.

Through our partnership with Lithium we can maximize this emerging channel for increased customer acquisition, retention, and loyalty for our clients. Our solutions fully integrate social networks into traditional support channels, and analyzes the vast array of information that is available about customer trends, preferences, and concerns. The result is the most integrated customer experience available providing enterprise with multi-channel revenue generation, customer management, knowledge management and customer analytic opportunities.

If you didn't already, I encourage you to listen to the replay of our recent joint webcast with the CEO of Lithium and the leading IDC analyst from Social Media. On the webcast we provide further insight into our strategic alliance with Lithium and share views on the importance of integrating social media channels into traditional customer management strategies.

Turning to our technology based solutions. We're currently experiencing solid growth in our revenue generation, virtualized workforce, and data analytics business. We believe these distinctive offerings which are fully integrated into our existing suite of solutions will enhance our growth and profitability profile going forward.

In our revenue generation business we're pleased with the pace of new wins. The solution has been cultivated over the last two decades and has a propriety data analytics, direct marketing, sales and knowledge base that delivers under paralleled results for our clients. The adoption rates for our virtualized workforce business are also continuing to accelerate and finally our data analytics business, albeit growing off a small base, delivers a strong profit margin we're committed to dramatically increasing our solutions in this area. These innovative solutions are very attractive to our current client base and have helped us forge relationships with new economy companies who provide tremendous growth potential.

This month we announced the significant multi-year agreement with one of the world's leading search engine companies to help them have the keys to expand their work to small and medium sized business along with large enterprise customers. To ensure we effectively market these differentiated capabilities and resume our growth trend we're actively investing in sales. We continue to hire industry leading vertically savvy sales professionals who are transforming the way we sell our service by ensuring we take a truly consultative approach around the globe. Our expanding suite of offerings is opening new doors, and providing sales channels and alliances we have not had the opportunity to pursue before.

We are well ahead of the next wave of growth. As we shift our attention and focus to 2011, our agility, innovation and demonstrated ability to provide scalable technology based solutions will further increase our strategic relevance with our clients and drive continued revenue diversification and profitable growth for our shareholders. With that, I'll now turn the call over to John after which I'll make a few closing remarks. Thank you.

Thank you, Ken, and good morning. Let me take a few minutes this morning to provide some additional insight into our second quarter results.

Revenue for the second quarter was $271.9 million which was essentially flat with the previous quarter and down from $301.5 million in the year ago quarter. Second quarter revenue would have been approximately $2 million higher had it not been for the impact of the weaker European and Australian currencies relative to the US dollar during the period. During the second quarter revenue was also reduced by $1 million due to the acceleration of a previously deferred contract acquisition cost for a small US program that terminated several years earlier than planned. As outlined in our second quarter Form 10-Q the year-over-year decline was primarily the result of decreased volumes in existing client programs due to the global economic environment we have spoken of previously.

On a positive note we have seen stability in our volumes over the past four months as measured by the number of calls and transactions we handled per business day. Looking at our gross margin, our second quarter gross margin was 27.1% compared to 29.3% in the year ago quarter. The decrease is primarily attributable to a lower mix of offshore revenue, lower capacity utilization and higher costs in certain International markets. These items in addition to the accelerated amortization of the contract acquisition costs I just discussed, drove the 120 basis point sequential decline in our gross margin from the first quarter.

Our second quarter SG&A was $39.7 million, or 14.6% of revenue. Compared to $45 million, or 14.9% of revenue in the year ago quarter. Excluding equity compensation expense of $3.4 million in the quarter, SG&A as a percent of revenue was 13.4%. We continue to aggressively manage our SG&A costs relative to our revenue.

Accordingly, we took additional actions in the second quarter to align our cost structure to assure we meet our full year 2010 operating margin guidance. As a result of these actions our SG&A declined sequentially by approximately $4 million. As we have discussed on previous calls, we believe to effectively support the business our SG&A should range between 14% and 15% of revenue.

Our second quarter GAAP operating income was $19.1 million, or 7% of revenue. This compares to $23 million, or 7.6% of revenue in the year ago quarter. Adding back approximately $2 million of restructuring and impairment costs, primarily related to employee severance, our second quarter non-GAAP operating margin was 7.7% of revenue virtually flat with the first quarter. If you excluded $1 million impact of the accelerated amortization of the contract acquisition cost, our operating margin would have been 8.1%.

Our effective tax rate for the second quarter was 26.1%. This was consistent with our first quarter effective tax rate of 26.5% and down slightly from 27% in the year ago period. We expect our full year effective tax rate to be between 24 and 26%. As for earnings per share our GAAP EPS was $0.22, and after adding back the restructuring and impairment charges, it was $0.24.

Turning now to our segments. Our North American BPO segment reported an operating margin of 11.8% down slightly from 12.3% in the year ago quarter. This decline was primarily attributable to a lower mix of offshore revenue and reduced capacity utilization.

Our International BPO segment reported a $6 million loss compared to a $5.3 million loss in the year-ago quarter. The cost increases driving this loss in the International segment, primarily related to three items. First, the ramp of certain programs for our Asia-Pacific clients. Second, a lag effect associated with reducing head count in programs for our Spanish clients due to industry labor agreements and local labor laws. And finally, a weaker euro relative to other currencies in certain of our offshore delivery locations. Improving the profitability of the International segment will continue to be a key priority of our leadership team. We expect the results of this segment to improve during the last half of the year as we complete the program ramps for our Asia-Pacific clients, and take additional steps to improve the profitability of our Spanish client programs.

Focusing now on our cash flow and liquidity, we continue to be very pleased with our generation of strong cash flow. We ended the quarter with $131 million in cash, no borrowings on our credit facility, and $5.4 million of other debt. As a result, our total debt to capital ratio is only 1.2% and our current ratio is 2.8 times.

Cash flow for operations was $23.3 million for the second quarter. After excluding capital expenditures of $5.7 million, pre-cash flow was $17.5 million. Our DSOs in the second quarter were consistent with the first quarter at 66 days. This is within our targeted range of 65 to 70 days. With our available cash on hand, strong quarterly cash flows, and available capacity under our $225 million credit facility we have the liquidity to funds our organic growth, invest in strategic technology initiatives, pursue select acquisitions and continue our share repurchase program.

Our second quarter capital expenditures were $5.7 million compared to $5.8 million in the year ago quarter. As Ken discussed earlier, we continue to commit both capital and operating expenditures to the development and enhancement of our proprietary suite of technology enabled offerings. For 2010 we now believe capital expenditures will range between $25 million and $30 million.

We continue to look actively at various opportunities to deploy our available capital. We still believe strongly that one of the best uses of our capital is our stock buyback program. As such, during the second quarter we once again actively repurchased our shares.

During the quarter we bought 1.4 million shares for $17.7 million. That bring us for the year to having repurchased 2.4 million shares for approximately $37 million. Additionally, we announced yesterday that our board approved a $25 million increase to our share repurchase program. This increased authorization provides us with approximately $38 million for future share repurchases.

In summary, we are confident in our ability to deliver improved top line performance as the pace of new business accelerates. We remain committed to driving strong operating performance and cash flow. As such, we have reaffirmed our previous business outlook and believe that 2010 revenue will approximate $1.1 billion, and operating margin will range between 8% and 9%, excluding unusual charges. Thank you. And with that I'll now turn the call back over to Ken.

Thank you, John. In conclusion, we are committed to remaining at the forefront of innovation through operational excellence in our core business, and through the expansion of our technology based offerings. As a result, we're confident in our abilities to address the evolving opportunities within our industry and position ourselves for improved performance. I look forward to updating you on our continued progress in the coming quarters. Thank you.

Thank you, Ken. As we open the call to your questions, we would ask that limit your enquiries to just one, so we have time take everyone's questions. Thank you, and operator you may now open the call for questions.

Thank you, again. (Operator instructions). One moment. Ashwin Shirvaikar your line is open.

Thank you. Hi, Ken. Hi, John. My question is about the technology based and non labor based offerings. How big a percent of revenues is it today, and if you can provide some information on the margin and cash flow characteristics. That would be great.

Ashwin, this is John. I mean relative to pure technology based solutions right now it's about 10% of our revenue. Some of the revenue generation activities that we also talked about is another 10%. That has a heavy technology component in it as well, and again, the core offering also takes advantage of the technology suite that we've put in place. In terms of the cash flow and the profitability characteristics, as Ken indicated in his remarks, both on the technology side and some of the newer offerings, we expect the profitability of those particular offerings to be higher than the traditional labor based core offering.

Okay. And on International BPO any rationalization possible there, or do you need to be in all those countries in terms of -- obviously in terms of the profitability of that.

Yes. Again, Ashwin, this is John. And what I would tell you is that we are continually looking at the various countries that we operate in internationally. Part of that strategy is also to look at how we can take business that's currently in country in some of these first world markets and take them to the delivery capability we have offshore. That would help improve the profitability of those particular programs over time as well. But we aggressively manage the various geographies that we are in. As we talked about previously, have taken steps to close capacity, and in some cases complete countries, when they really get to a point where they don't meet the profile, and we don't see an opportunity to improve it going forward.

If I can squeeze one more in. Any [real] you can throw out on how back to school spending, consumer spending is shaping up?

Ashwin, you're cutting in and out a little bit. Let me just see -- well, if we look at our July numbers our July numbers are were actually up somewhat which was very encouraging to us. As for August, it's right now -- it appears to be flat, but that is due to the fact that Europe tends to be on vacation for the month of August. So we think that right now we're right where we wanted to be and where we expected to be.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Eric Boyer with Wells Fargo. Your line is open.

Yes. Thanks. I think you just answered the first one. One of your competitors recently talked about a broad based decline in volume forecast for the last three to four weeks. Can you just talk about what you're seeing from your clients as far as forecast looking out?

Our forecast right now going forward is that we expect to see volumes -- basically being somewhat flat through the year but definitely increasing in to next year. For a myriad of reasons. One is we believe that the majority of our client bases has pretty much stabilized albeit we're premature in saying that in that we only have about two to two and a half months of data and this economy is till quite fragile. And so obviously anything can happen, but if we just look at July and also at June, it's just that we're not seeing volume reductions like we were seeing in the previous quarters. Secondly, due to the fact that we're seeing a pace of new business signings coming up as well as we're -- and signings that new deals that we're converting as well as we're now starting to see many of our embedded base clients coming to us and asking us to start to increase the actual capacity that we've been currently providing them.

So I would say that we are cautiously optimistic. Overall we're feel willing like we're really making some real traction right now, and we're hopeful that the worst is behind us. And as for other competitors, frankly, we don't really -- we're focused on our business and our set of capabilities, and I'm sure that they have different circumstances.

Can you talk about some of the back office work that you're currently doing and then also hope to do? Can you give us some examples of exactly what that entails?

Oh, goodness. It really spans the gamut. We're doing everything from F&A work where we're doing work in the finance and accounting area whether it be in areas like payroll, or areas like various different forms of bill reconciliation. We're doing a fair amount of network provisioning and engineering work for the telcos around the world. We're doing work in mortgage origination area. We're doing work in claims processing for the health care industry. It's really pretty much all over the board. And quite frankly, we're expanding in that area pretty significantly right now. So I think you're going to see some very definitive products that we'll be announcing very soon that will be very focused on a whole series of new work streams in the back office area.

And then just finally, on the $80 million of new incremental revenue can you just talk about some of the verticals that you're seeing strength in there?

Well, we're really seeing it in many areas. We're seeing it in areas like the communications and media area, we're seeing it in automotive, we're seeing it in retail and we're seeing it in financial services.

Okay. Thanks a lot.

Thank you.

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

Good morning and thanks for taking my questions. Can you talk about gross margins. They were down a little this quarter. What are your thoughts in terms of second half and going into 2011? How do you see margins trends shaking out and why?

Bob, it's John. In terms of the gross margins and the slight decline over the previous quarter, obviously as we come off of that seasonal lift in the first quarter, we have some additional capacity that's available to us, which again, we're make I conscious decisions to keep capacity in certain areas. As such we have that carrying cost. That'll drive it down a little bit. Also there was a 40 basis point impact from that accelerated amortization that we talked about in our previous remarks that drove it. In terms of the outlook going forward, again, we believe that they'll be stable through the remainder of the year and increasing as we bring on some of the new business that we talked about.

Can you comment on the gross margin difference between some of the new technology business, or maybe operating margin impact between what you're doing now, and maybe the way the mix was going to change over the next year or two?

Yeah. Bob, I think because we don't really get into specifics on gross margins what I would just simply say is, you can rightfully assume that there's not a technology offering that we are bringing to the marketplace, or providing to the market that does not have industry standard software like margins of leading software companies. Whether it be the Microsofts or the Oracles of the world, and so I will let you come to your own conclusions from that. We're quite satisfied with those margins.

Okay. And can you be a little bit more specific in terms of the Cisco/Salesforce.com deal in terms of revenue potential but also exactly what -- I want to make sure I'm clear in terms of exactly what you're offering and how you're selling it.

Yes. I think it's premature for us to really state what the revenue potential is. The pipeline is actually building as we speak and I think it really would be premature. What I would just simply tell you is TeleTech has a relatively small sales force on a global basis in comparison to organizations the size of Cisco, and in comparison to organizations the size of Salesforce.com. I think what's exciting about this opportunity is that we're proactively working with them and their sales force, where they're actually being commissioned to bring these deals to us. And so now instead of having, let's say 350 or so, salespeople around the world working on attempting to sell various different on demand and technology capabilities. That number is obviously going to ramp to numbers that will be many, many, many fold of what we have.

So we think that's a very good thing. We think that will lead to a myriad of opportunities, and I think it's safe to say that we wouldn't have made this announcement if we didn't have some future -- some potential clients that, shall we say, might already actually be signed or about to be signed that we'll be excited to announce in the future that our major household names. So we think we're offer to a good start and I think that at this point we'll leave the potential and the size to a few quarters out when we have a little bit more traction under our feet.

Okay. Thank you.

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

Thank you. I was wondering if you could give us some color on historically the relationship between and acceleration in new sales and future kind of utilization and margin trends. Thanks.

Tobey, it's John. We expect, obviously, that as a new business ramps up that we will see trends that are consistent with what we have seen previously. As we talked about previously, many of the programs depending on the size and the number of locations that are going into, may take us anywhere from six to nine and in some cases a year to ramp. As that business comes on and that capacity begins to get utilized, we do expect that we'll see a lift in the operating and gross margins of the Company.

Thanks. And as a follow-up I assume that the mix of sales that you're getting is in some of these higher margin SAS type areas. So is it possible that the relationship between new sales and margins could be perhaps more positive than it has been historically?

I think that's the plan over the longer term. Obviously, as the mix starts to shift. So clearly, this is a strategy that we've been working on now for multiple years. We've made hundreds of millions of dollars of investment to be able to get to where we are. And we feel that we're now in a position to have something that's enterprise class, that's global, and that really can take advantage of the cloud demand that's out there right now, and we think that we are the most credible provider of that type of capability.

Thank you, Ken. Last question. You certainly seem to be a company that's in transformation and offering some innovation that the legacy peer group isn't necessarily involved in. Who is the competition for your more cutting edge sales at this point?

Well, in the rev gen area this is something that Direct Alliance has been doing for nearly 20 years. I think it's 17, 18 years, and we actually don't believe we have competition in that area. A tremendous amount of technology behind what it is that they do. So that we are pushing more and more into the electronic direct marketing frontier, and shifting farther and farther away for a lower overall labor component. And we find that their offering is an absolute critical offering to the suite of everything that we're doing today.

In the area of on demand there are a few very small venture backed providers that, quite frankly, their offering is maybe more geared towards the small business area, but truly they don't have an enterprise or a global capability let alone a global network. So that would be in the on demand small area.

And then in the data analytics area, there's several companies that are providing data analytics and data management on a stand alone basis. We think what makes ours unique is that it is totally integrated into all the of the data that we capture, and therefore, we're providing meaningful information that's actionable. And so all of these capabilities are integrated horizontally so that we can truly start to take advantage of where this electronic marketplace is moving. And then lastly, our whole Social CRM capability, we don't think there's a company that matters to us out there that is not deeply embracing social media and yet at the same time is lost in how to deal with the onslaught and the percentage of customers that are meeting them and greeting them with companies like Twitter and Yelp, just to name a few. And so we think that we're right at the intersection of where the growth is in the industry and being able to take advantage of that.

So in that area we're not aware yet of who those competitors are. I'm sure there will be several that will emerge, but what all of these competitors are going to have a tremendous disadvantage at is that we didn't just start this three weeks ago or three months ago because we thought it would be novel. It's something we've been working on truly for years, and therefore, we think that we're very well positioned to provide, like I say, an enterprise class capability and solution.

Thanks.

Thank you. (Operator Instructions). Sri Anantha of Oppenheimer you may ask your question.

Yes. Thank you. And good morning and first of all congratulations on the good results and easing some of the concerns out there. Ken, question for you. Clearly, I think when you look at what's happening in the industry and your own migration to some of these higher margin revenue opportunities. There is some sort of a transition happening and how do you expect TeleTech to manage the transition? In other words, what I'm trying to understand is this on demand, or the technology based revenues that you are seeing. How soon do you expect to become a much more meaningful or more than 50%? Is it going to happen over the next two years, three years? And secondly, I know in the context of M&A that you mentioned in your prepared remarks you clearly have a really good balance sheet there. Do you think the industry needs to consolidate on the legacy front and what impact is automation having on those legacy volumes? Thank you.

Well, I think you've asked multiple questions here and I'm not sure I'm going to be able to get to all of them. But what I would say is the question regarding adoption and how we're going to transition. Again, we've been selling these on demand capabilities for quite some time. The difference between today versus when we first started is that A, we've fully [productized] the capability and we're now properly marketing them. B, we now have a sales force that has the information that's institutionalized. C, we now have go-to-market partners and there will be several more go-to-market partners announced in the near future. .

And so therefore, it's very premature for me to predict the adoption other than to simply tell you that we already have 10% of our revenues in that area, and therefore, we believe that we're going to continue to see growth in that areaOur pipeline is very robust in this area. That said, these sales are quite complex. They require a very different type of person and organization, which is built and is in place, to support these types of capabilities.

So I think that as far as how should people be looking at when will we see meaningful amounts of technology revenue I think that it should really be looked over a 36 month period to a 48 month period. And I think that we will be able to report on an annual basis the kind of progress that we're making and the impact that it's having. We meant what we said when we said in our script that there is not a single opportunity that we're working our pipeline that does not involve this suite of capabilities.

So I think it's safe to say that you'll see steady increases over the next two, three years which will allow this to become a material part of our business on a revenue side, and in reality it will be a material part of our margins in a very short period of time just because of the margin profile. Now, you asked another question and if you wouldn't mind repeating

Consolidation of the legacy industry.

What about the legacy industry.

Where we thought it was going. Sri, correct me. I'm telling Ken that I thought your question was on his views on consolidation in the legacy industry.

That's right. Yes.

Yes. I think we're outliers. I don't know if that's good or bad as it relates to the industry. We have always had a strategy of winning clients for life of and keeping them for life. Our average client has been with us for over a decade, and we just think that Wall Street obviously has a need to bucketize us with other companies. But we think that the capability they are offering, albeit a very necessary capability, is a really different capability than what these folks are doing.

Our goal is not to do more of the same in the legacy space. Our goal is to provide a complete end to end solution that ultimately has outcomes that are focused on things like net promoter scores. We see the whole industry for the most part really focused on a lift and shift and on a labor focus, And frankly, we don't see most of those providers focused on the technology space, nor do we see them having the financial wherewithal or the balance sheet to actually even invest in these areas; let alone we think that if they were to start to invest in these areas. It would take them three to four years, minimally, to really get to these kinds of capabilities.

So that's why we tend to run in more to IBM and Accenture than we do these other companies that people assume that we compete with on a day-to-day basis. The good news is that IBM and Accenture are very good clients of ours, and that we constantly are going to market with them on various different opportunities.

I want to just stress labor is a finite resource and labor is a resource that's hard to achieve the kind of leverage that we can achieve off of technology. So you're going to continue to see us maintain our core business, but if it doesn't ultimately have a very significant technology component, we probably aren't really interested in the business. We'll leave that for people who that's what they want to do. I think that it will change our margin profile pretty dramatically. So I hope I answered your question and I apologize for being so long winded.

No that's fine. That was helpful, Ken. Thank you.

Thank you.

Thank you. Our last question comes from Bob Evans with Craig Hallum Capital. Your line is open.

Thanks again. One clarification. I can't remember if it was Ken or John who said July was up a little bit. When you say up a little, are you talking year-over-year or sequentially? In terms of business trends.

Yes Bob. It's John. That comment was made in relation to the volume of activity we handle on a business day basis. And so when we look at July relative to the last several months, we did see a nice uptick in that per day volume.

Okay. And can you also comment, John, in terms of how far your hedge is right now this year into next? And what currency impact was this quarter? Because I know some of your competition had a relatively significant currency hit, and just trying to differentiate.

Yes. In terms of hedging going forward, again, in key markets where we do a lot of the work offshore we're appropriately hedged against those currencies to the extent that we see risk as such. In terms of the currency impact I know we've outlined it in the 10-Q. I mean there was some impact in the last quarter relative to -- primarily to the Euro and where it was at relative to the dollar.

Can you say how -- I guess looking for magnitude in terms of Euro or Philippine peso -- are you relatively far through six months; 2011? I'm just wondering just how far hedged out you are.

Some of our hedges go out well into 2011 and 2012. Again, our program is very sophisticated and it isn't something we're in and out just periodically. I mean this is a long term program that has provided a lot of stability in our operating margin. As we sign deals we look at the term of that deal and we make appropriate hedges, if you will, or takeout appropriate hedges, to ensure that we're locking in the margins we expected when we signed the deal.

Okay. All right. Thank you.

Yes.

This concludes the TeleTech's second quarter 2010 earnings conference call. You may disconnect at this time.

Thank you.