TeleTech Holdings, Inc. Business Update Call Transcript

Executives

Karen Breen – Vice President, Investor Relations & Treasurer

Kenneth D. Tuchman - Chairman of the Board & Chief Executive Officer

John R. Troka, Jr. - Interim Chief Financial Officer & Senior Vice President, Global Finance

Analysts

Josh Vogel – Sidoti & Company, LLC

Bob Evans – Craig Hallum Capital

Tobey Sommer – Sun Trust Robinson-Humphrey

Greg Smith – Merrill Lynch

Matt McCormack – Friedman Billings Ramsey

Tom Smith – First Analysis

Ashwin Shirvaikar – Citigroup

Dhruv Chopra – Morgan Stanley

Shlomo Rosenbaum - Stifel Nicolaus & Company

Eric Bowyer - Wachovia Capital Markets, LLC

TeleTech Holdings, Inc. (TTEC) Business Update Call July 17, 2008 8:30 AM ET

Operator

Welcome to the TeleTech business update conference call. (Operator Instructions) I would now like to turn the call over to Karen Breen, TeleTech’s Treasurer and VP of Investor Relations.

Karen Breen

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 restatement 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 development which are based on management’s current beliefs and assumptions. Such statements are 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, risks 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 asset impairment 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.

Kenneth D. Tuchman

I’m very pleased to announce we’ve completed the restatement of our historical financial statements of which the majority of the adjustments pertain to years prior to 2001. I’d 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 will begin by having John Troka, our CFO, provide an overview of the restatement as well as discuss our 2007 full year and first quarter 2008 financial results. After that I will provide an update of our business outlook.

I’ll now turn the call over to John Troka.

John R. Troka, Jr.

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 worked through this process. I want to thank our audit firm, 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-Q 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 acknowledgement that we are 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 willful 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 requires correction.

During completing the course of completing the equity-based compensation accounting adjustments we determined that there were other adjustments for 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-Q 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 pre-tax 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 period resulted in a pre-tax 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 estimate that the total incremental cost of the review statement paid to third parties for 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 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 tenth consecutive 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 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 are very pleased to have the restatement behind us and to have delivered ten consecutive quarters of strong performance. We look forward to continuing to advance our industry leading position and capture additional market share.

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

Kenneth D. Tuchman

Now that John has reviewed our full year 2007 and first quarter 2008 highlights I’d like to discuss our updated business outlook. Before I do that I’d 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 a goal that we set forth at the beginning of 2004 to reach a revenue run rate of $1.5 billion.

As we look through 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 continue 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’ve signed $302 million of estimated new annualized incremental revenue over the past nine months ending 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 1,500 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 1,000 workstations in size and being simultaneously deployed across multiple geographies. Additionally some of the new work is tier two and tier three 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 financial stable and capable BPO providers. Of the business we won during the during the first six months of 2008 we estimate that more than one-third has come from this client-based consolidation initiative and we are 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 market share 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’ve 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 workforce requirements until we determined that these lower volumes would continue with these particular clients. In addition while many of our clients are 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 improved 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 base 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 more 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 don’t believe it’s 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 will range between 9% and 10%. This revised margin outlook is due in part to the temporary higher costs 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 globe are making wage management difficult in the short term. While many of our larger contracts have annual cost-of-living increases there’s a lag at that 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 is the economic weakness is a temporary phenomena. 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 are actively managing through this period by successfully investing in new sales leadership to accelerate the growth of new client logos, we are vigorously pursuing price increases with our clients, we’re continuing to migrate under performing business out of our portfolio, we’re seeking additional economic incentives from various government entities the benefits of which we’re already starting to recognize in certain countries, we’re 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’re uniquely positioned to capture market share. 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 are seeing the outsourcing trend that began in the US further expanding as it’s 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 offshore outsourcing models.

We continue to capitalize on the Global 1000 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 re-emphasize 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 under valued relative to our current performance and future growth prospects and industry position. I’d like to remind you however that we are currently in a blackout period and will be unable to repurchase stock until we’ve released our second quarter earnings. We plan to release those results during the first week in August.

With that I’ll now open the call to your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Josh Vogel – Sidoti & Company, LLC.

Josh Vogel – Sidoti & Company, LLC

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?

Kenneth D. Tuchman

I’d say that it’s pretty much broadly it’s globally. Food prices and energy prices are being affected on a global basis and I don’t think any country is immune to it.

Josh Vogel – Sidoti & Company, LLC

Are your clients being at all receptive to pricing increases?

Kenneth D. Tuchman

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. The receptivity has been very positive. Our clients are experiencing this for themselves and realize that they can’t ignore the fact that if the front line is incurring higher personal costs that that eventually translates through to the fact that they’re going to need to ultimately make more money. In some cases the government is actually taking care of it. In countries like Spain and countries like Argentina they’re 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’s a bit more location sensitive, etc.

So it’s nothing that’s spiraling out of control, it’s nothing that’s a significant problem and it’s something that we think that we can profitably manage through. But I think you can’t ignore the fact that food prices have gone up in 12 months 60% to 80%, oil has gone up, last I checked close to 90% for the year. That excludes what it went up the year before, so naturally this is creating pressure on our front line.

Josh Vogel – Sidoti & Company, LLC

Shifting gears a little bit, if you exclude any of the one time stuff, it looks like your international segment under performed a little bit in Qs 4 and 1, it looks like you posted losses of about $1 million in operating income if I’m looking at that right. I was curious what was driving these losses.

John R. Troka, Jr.

Relative to that performance a couple of things, one is a bit of seasonality in some of the business in our international locations in the fourth quarter as well as 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. Long term when we see those migrations it improves our profitability but as we do the transition, bringing up the new workforce while bringing down the existing line in country there is a duplicative cost effect.

Josh Vogel – Sidoti & Company, LLC

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

Kenneth D. Tuchman

No, it doesn’t. Sprint is really on track for budget that we came out with earlier in the year.

Josh Vogel – Sidoti & Company, LLC

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

Kenneth D. Tuchman

No, we’re not doing any work for SK and it’s impossible for me to comment on something that I really have no knowledge of or that’s 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 and in the healthcare industry we’ve seen it, in the banking industry we’ve seen it and they tend 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 company that might be interested in doing something of strategic nature with that particular client.

John R. Troka, Jr.

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

Josh Vogel – Sidoti & Company, LLC

Lastly, John did you say that the total one time charges you expected for the legal and audit fees were going to be $21.5 million?

John R. Troka, Jr.

Yes, sir.

Josh Vogel – Sidoti & Company, LLC

So it’s about $5 million for Q2?

John R. Troka, Jr.

Between Q2 and Q3 the bulk of that in Q2 obviously was just now filed.

Josh Vogel – Sidoti & Company, LLC

I meant Q2 ‘08.

John R. Troka, Jr.

Q2 ‘08 and a little bit in Q3.

Operator

Your next question comes from Bob Evans – Craig Hallum Capital.

Bob Evans – Craig Hallum Capital

First, John stock comp for the year how should we view stock comp for ‘08?

John R. Troka, Jr.

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

Bob Evans – Craig Hallum Capital

If we look at Q4 of ‘07 one thing that I had noted was that the gross margin was lower than I thought. It seems to have dipped down a couple hundred basis points, recovered nicely in Q1. Is there some one time things going on there or could you elaborate in terms of why gross margin may have been down?

John R. Troka, Jr.

In terms of the operating margin being down in the first quarter, some of the.

Bob Evans – Craig Hallum Capital

Fourth quarter of ‘07.

John R. Troka, Jr.

Fourth quarter, some of that is being driven just by the sheer ramp volume that occurred in the fourth quarter we layered on close to $40 million in incremental revenue. As we talked about before depending on how we build for the training and the ramp cost to our clients determines if we 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 ramp.

Bob Evans – Craig Hallum Capital

Ken, can you elaborate in terms of, I know you can’t be company specific, but could you 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’re seeing continued strength?

Kenneth D. Tuchman

I’d say predominantly where we’re seeing lower volumes with certain clients is in retail, in healthcare where there’s some subscriber attrition and in some cases in hospitality. I’d say we’re seeing considerable strength in communication and media which would cover the wireless space, the high speed online space, the fixed [inaudible] space and the satellite cable space. All of those areas for the most part are growing and are doing quite well. We’re also seeing growth in financial services. It’s no secret that the financial 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.

Bob Evans – Craig Hallum Capital

Q3 is typically a decent signing for you in terms of new business. How is that shaping us thus far?

Kenneth D. Tuchman

We’re very bullish on Q3 and on the signings that we believe that we will get done and we see no reason not to meet our exceed our internal forecast. 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 2,000 workstation range and we’re feeling very good about third quarter.

Bob Evans – Craig Hallum Capital

To clarify the weakness in revenue that you’re seeing, it’s 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 that you think the pipeline of demand continues to be strong?

Kenneth D. Tuchman

Definitely, it’s pretty simple. You’ve 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 dropped precipitously really starting in the first week and second week of June. What’s interesting is we had a client where the volumes appeared to drop precipitously, we went back to them, they told us they were re-forecasting and then asked us to make some changes to the staff downward. We started to make those changes downward and last week they came back to us and told us to put everything on hold because the volumes are now coming in significant higher than what they estimated.

We’re only as good as the forecasting information that we have from historical as well as the revised forecasts 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 don’t always get that update so usually there’s a fair amount of consistency within that and within some of these sectors we’ve seen some softness in their volumes and that’s what’s really created approximately $30 million of revenue that we’ve taken out of our embedded base on a temporary basis.

Bob Evans – Craig Hallum Capital

Final question, the operating margins, 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 cost that’s created some of the margin 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.

Kenneth D. Tuchman

Bob, that’s 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’re 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. They’re seeing the same thing and if by us getting ahead of it we can mitigate it from being a real problem. Right now it’s 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 COLAs. The bad news is that between now and the time that we get to our COLAs if we don’t 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.

John R. Troka, Jr.

Bob, the only other thing I would tell you and obviously everybody listening on the call is just relative to the forecast it’s 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 talked about it which is the movement of clients from the current in country operations to offshore and the like. There’s a lot of interplay with a number of different factors on that.

Operator

Your next question comes from Tobey Sommer – Sun Trust Robinson-Humphrey.

Tobey Summer – Sun Trust Robinson-Humphrey

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

Kenneth D. Tuchman

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 rolling 90 day forecast. 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’re providing actual feedback based on arrival patterns, based on products that they’re launching, etc. 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 adjust it to the next 30 day segment.

Tobey Summer – Sun Trust Robinson-Humphrey

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

Kenneth D. Tuchman

I think it’s a combination. I think that the last probably 18 to 24 months there has 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 cost I think that now what’s happening is we’re 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 back office, how quickly could you take this function over? Can you do finance and accounting for us? Can you do various different functions, etc. and that is tied to the fact that their own fuel prices are going up, they’re in a business that’s maybe very driven off of transportation costs and they need to offset those costs and hence what they’re saying is they can no longer do this A) internally and B) it most likely can’t be done in an onshore environment.

I think that there is a significant catalyst because what’s different about this type of an economic cycle that we’re in over others, not that we haven’t had something similar, is that you have a slowdown coupled with inflation and when you have both those things happening and you’ve got the Global 1000 wanting to try to maintain some semblance of profitability they’re going to do everything they can to find ways to have a significant impact on their cost so they can offset the inflationary aspects of their business and I’d say that that’s been a real driver, it’s giving us the confidence for second quarter being, from a signing standpoint, where we expected it and it’s 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.

Tobey Summer – Sun Trust Robinson-Humphrey

Do you consider the offshore work even stickier than domestic work? 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 comment or update you could give us on that would be great as well.

Kenneth D. Tuchman

We’ve traditionally had a very sticky customer base. A lot of that’s tied to the type of capabilities we have, some of the technology offerings that we offer, etc. The majority of our clients have been with us five, 10, 12, 14 years and I would just say that regardless of whether they’re onshore, offshore they’ve 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 and just tied to the fact that 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 empirically to them our relationships tend to be very long term in nature and very sticky and that’s why we typically go into all years with very high revenue visibility because we’re not having to constantly go out and get new business. Instead we’re focused on growing the embedded base.

As for as expanding into another country, we’ve expanded into South Africa, we’re very comfortable that we’re a couple 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’re in very advanced stages on to expand to that we’ve completed all of our government negotiations and have located our buildings, etc. 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 disbursed 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.

Operator

Your next question comes from Greg Smith – Merrill Lynch.

Greg Smith – Merrill Lynch

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 profits?

Kenneth D. Tuchman

I think that on an annual basis it’s been averaging about $25 million to $30 million a year. I wouldn’t be surprised if this year it accelerates a little bit. What I would tell you is if that does happen we view that as a positive not a negative. It’s very difficult to make a fair profit in Canada or in the United States 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’re saying nope we want to now do it right now, let’s get it over with and that’s that.

Greg Smith – Merrill Lynch

On your goal of the 12% to 14% operating margin and I think you previously had talked about a $2 billion revenue run rate, any timing you can put around those goals at this point?

Kenneth D. Tuchman

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, possibly a little bit slightly earlier than that. I think as it relates to our loner 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’s going to have an impact as well as while we sort through some of these pricing increases. We don’t think that anyone should look at our business medium 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.

Greg Smith – Merrill Lynch

Lastly now that you’re 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 doesn’t sound like it given the quantity of new business signed, but any thoughts there?

Kenneth D. Tuchman

I think that the good news is that our operations and 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 didn’t have as much access to them as they historically would like finance, accounting, legal, etc., etc. What would I just simply say to you is that it’s business as normal from today on and we’re 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.

Operator

Your next question comes from Matt McCormack – Friedman Billings Ramsey.

Matt McCormack – Friedman Billings Ramsey

In terms of the large deals that the ramp up have been delayed somewhat could you just give us a little bit more detail on what’s going on there, if it’s just that these are deals that larger than you’ve normally done, is it on your side, is it on the client’s side? Then you also talked about trouble finding labor for those deals, could you just talk about what geographies you’re seeing that issue in?

Kenneth D. Tuchman

First of all, let me clarify. The deals are ramping as scheduled meaning that they’re starting on time so we’re not seeing deals that we’ve 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’re going after what used to be a typically three week education requirement is now turning into six to eight weeks. Consequently it’s doubling the length of time to get people educated and then get them into their workstation in their revenue producing mode. That in 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. It’s not that they’re being delayed, they’re just being elongated in the amount of time that it takes to source the employees, train the employees and then ramp the employees.

I think the other part of your question was related to difficulty in us finding employees. We’re not experiencing difficulty in finding employees. As a matter of fact I’d say that that’s our core strength, being able to attract them through our talent acquisition group so that’s 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’re not in a situation where there’s not adequate labor when we need it.

Matt McCormack – Friedman Billings Ramsey

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

John R. Troka, Jr.

Relative to pricing, Matt, we’re actually again seeing stabilization, realization on the part of our clients that there are some cost changes that occurred out there and so we are working with our clients on that. We don’t see that there’s any pressure on the down side relative to pricing.

Operator

Your next question comes from Tom Smith – First Analysis.

Tom Smith – First Analysis

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

Kenneth D. Tuchman

In certain markets we’ve seen 6%, in other markets we’ve seen flat. In places like Argentina it’s been higher. But like I say we’re very successfully passing that through to our clients and they very much understand it.

Tom Smith – First Analysis

Can you say what percent of your contracts have the COLA agreements?

Kenneth D. Tuchman

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

Tom Smith – First Analysis

On your revenue outlook, looking at the reduction that you have you said from the midpoint to midpoint it was $80 million. 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?

Kenneth D. Tuchman

No.

John R. Troka, Jr.

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. Because of some of the elongated ramps that Ken has talked about, that’s 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 million related to softening of volumes in a handful of clients.

Tom Smith – First Analysis

On your update to the margins, I just want to be clear on the expectations, you’re 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?

John R. Troka, Jr.

Yes.

Tom Smith – First Analysis

Can you comment at all on your expectations for 09? In the past you had said I think 100 basis point improvement was possible over ‘08 levels. Is that still a goal?

John R. Troka, Jr.

That’s certainly still our goal but at this point we’ve put out temporary short term guidance and we’ll obviously update as we have more information available to us.

Operator

Your next question comes from Ashwin Shirvaikar – Citigroup.