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TeleTech Holdings, Inc. (NASDAQ:TTEC)

Q2 2008 Earnings Call

August 4, 2008 8:30 am ET

Executives

Karen Breen - Treasurer, Vice President Investor Relations

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

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

Analysts

Tobey Sommer - SunTrust Robinson-Humphrey

Bob Evans - Craig-Hallum Capital

Gene Shirpa - Analyst

Matt McCormack - Friedman Billings Ramsey

Shlomo Rosenbaum - Stifel Nicolaus

Tom Smith - First Analysis

Josh Vogel - Sidoti & Company

Eric Boyer - Wachovia

Ashwin Shirvaikar - Citigroup

Operator

Welcome to the TeleTech second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Karen Breen, TeleTech's Treasurer and VP of Investor Relations. Thank you, Madam, you may begin.

Karen Breen

Good morning and thank you for joining us today. This is Karen Breen, Treasurer and VP of Investor Relations. We are hosting this call to discuss our results for the second quarter ended June 30, 2008. Participating on today’s call will be Ken Tuchman, our Chairman and CEO; and John Troka, our CFO.

Earlier today, TeleTech issued a press releasing announcing that its quarterly report on Form 10-Q had been filed with the SEC. This call will [inaudible] items discussed within that press release and Form 10-Q and TeleTech management will make reference to them 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, future plans and developments, which are based on management’s current beliefs and assumptions. Such statements are subject to various risks, uncertainties, and other factors that may cause our actual results, performance, and achievement to differ materially from those described. Such factors include, but are not limited to, reliance on [key 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 2008 business outlook, execution risks associated with expanding capacity in a timely manner to meet demand and the possibility of additional asset impairments and/or restructuring charges.

A replay of this conference call will be available on our website through August 18th.

I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Kenneth D. Tuchman

Thank you, Karen and good morning to everyone joining us on today’s call. I would like to take a few moments to provide a high level summary of our financial results. After that, John Troka will discuss the second quarter performance in more detail.

I am pleased that we delivered another quarter of solid financial performance. Our second quarter revenue grew to around $357 million with our BPO segment revenue increasing by 10.4% over the year-ago quarter. We continue to capture market share and attribute this to several key factors, including a move by a growing number of companies to consolidate work with those providers who can deliver a high quality customer experience while simultaneously driving more efficient business processes. Increasingly, these companies are finding that their choice of qualified providers has narrowed as they seek financially stable BPO partners who are investing in innovation to successfully scale large, complex, global outsource solutions.

These trends continue to favor TeleTech. Over the past year, we have enjoyed a strong pipeline with steady conversions of these opportunities into some of the largest new business wins in our history.

Although historically the second quarter has been our lightest in terms of new business wins, this quarter’s signings were stronger than anticipated, reaching an estimated $65 million of annualized revenue. The slowing global economy continues to be a catalyst for new and existing clients to aggressively embrace outsourcing. We believe that our third quarter will again reflect another strong pace of new business [inaudible] as we are near closing on several new opportunities.

To this end, we are continuing to expand our delivery capacity, especially in offshore locations. Our offshore capacity now represents more than 60% of our total delivery capability and we are currently on track to add between 6,000 and 7,000 offshore workstations during 2008, a testament to the rapid scalability and technological sophistication of our global delivery platform.

While revenues have continued to grow, our profitability has also increased. Our second quarter operating margin, excluding restructuring and restatement related charges, was 9.4% compared to 9.1% in the year-ago quarter. Non-GAAP earnings per share rose 28% to $0.32 in the second quarter, up from the non-GAAP earnings of $0.25 in the year-ago period. These numbers exclude restatement related fees, along with asset impairment and restructuring expenses.

Let me now highlight certain balance sheet and liquidity metrics. Our low debt-to-equity ratio and free cash flow continues to fund both our organic growth and our share repurchase program. During the first half of the year, our free cash flow totaled $23 million and we ended the second quarter with $127 million in cash and cash equivalents.

As we discussed on the last call, our board has increased the funding for our share repurchase program up to $100 million. The board made this decision based on their belief that our stock is significantly undervalued and their strong belief in our industry position and company fundamentals. We plan to begin aggressively repurchasing TeleTech stock in the coming days.

Lastly, we believe we have one of the highest returns on invested capital in the industry with a 27% ROIC at the end of June.

Before I turn the call over to John, I also wanted to clarify some of the points I discussed on our last call related to our updated 2008 outlook. I would like to emphasize that our revised business outlook and the timeline of our return to double-digit growth are not singularly tied to the economy. This period of time relative to the last slowdown in the 2000 timeframe is very different. During that period, we had no revenue growth, we had virtually no sales pipeline, and new business wins were taking 12 to 18 months to close.

In today’s business environment, we are seeing the exact opposite. We are enjoying meaningful revenue growth with increasing profitability. We have a robust pipeline that’s resulting in significant new business wins and these deals are taking half the time to close. We believe the strong sales pipeline, short conversion cycles, and size of new deals will ultimately allow us to sell through the near-term softness with certain clients.

All of the above gives me confidence in attaining our updated 2008 guidance from both a revenue and profitability perspective.

In summary, as I have said before, TeleTech is a company built for the long-term sustainability, growth, and free cash flow generation. Our reputation for solid execution and our unparalleled management team make us an even more attractive choice among the narrowing range of competitors. We believe that we are in a position to continue to gain market share via vendor consolidation and the [inaudible] of quality that draws clients to our centralized global delivery model, our innovative and high quality solutions, and our expansive offshore footprint.

Let me now turn the call over to John, after which I will make a few closing remarks.

John R. Troka Jr.

Thank you, Ken and good morning. I would like to provide some additional detail on our second quarter financial results. As outlined in today’s press release and in our Form 10-Q, which we filed this morning, we reported record second quarter revenue of $357 million, an increase of 8.4% over the second quarter last year.

Our gross margin this quarter decreased 240 basis points to 25.6% compared to the year-ago period. This increase in gross margin was due to several factors. These include lower client volumes that resulted in higher idol capacity, duplicative near-term costs associated with the more aggressive shift of business offshore by certain clients, and inflationary cost pressures affecting our workforce in certain geographies.

Our SG&A decreased year over year in both absolute and percentage terms. SG&A spending fell almost $3 million to $45.9 million, or 12.8% of revenue, down from 14.7% in the year-ago quarter. Included in our second quarter SG&A was a $3.4 million expense related to our recently completed restatement of our historical financial statements. We expect to incur approximately $1.5 million of additional professional fees related to this restatement in the third quarter.

Our second quarter GAAP operating margin was 8.3%, up from the 4.9% operating margin for the year-ago quarter. Excluding restructuring, impairment, and restatement related charges that totaled $3.8 million, our operating margin was 9.4%, an increase of 30 basis points from the 9.1% operating margin in the second quarter of 2007, which also excluded unusual charges.

Our second quarter results included $2 million of equity compensation expense, or about $0.02 per share. This compares to $3.2 million, or about $0.03 per share of equity compensation expense in the second quarter of last year. Excluding this expense, our second quarter operating margin would have been 9.9%.

GAAP EPS for the second quarter was $0.28, compared to $0.12 last year. In our GAAP EPS was $0.04 of charges for restructuring and restatement related expenses. Excluding these charges, our adjusted 2008 second quarter EPS was $0.32, compared to an adjusted EPS of $0.25 in the year-ago quarter, a 28% increase.

Our effective tax rate for the quarter was 25.9%. This rates was positively influenced by earnings in international jurisdictions currently enjoying an income tax holiday. Furthermore, the distribution of income between the U.S. and other lower tax rate jurisdictions internationally helped to reduce our overall rate. We continue to believe, however, that our effective tax rate in future periods will be approximately 30% to 33%, principally because we expect the distribution of our portfolio income between the U.S. and international tax jurisdictions to return to levels we have typically seen in recent years.

Turning to our balance sheet, we ended the quarter with $127 million in cash and cash equivalents. We had a low debt-to-equity ratio of 18.9% at quarter end.

As Ken said earlier, the strength of our balance sheet gives us plenty of capacity to fund future growth initiatives, as well as our expanded share repurchase authorization. In mid-July, our board approved an increase in funding up to $100 million for stock repurchases and we plan to resume our repurchase program in the coming days.

Our DSOs were 70 days in the second quarter, up from 66 days in the year-ago quarter but within our targeted range of 65 to 70 days.

Our capital expenditures for the second quarter were $21 million. Much of these expenditures related to the addition of 2,400 workstations in the Philippines, South Africa, and the U.K. In addition, we continue to invest in our information technology and voice-over-IP platforms.

We believe our total capital expenditures for 2008 will range between $60 million and $70 million as we continue to ramp new business and transition some existing business to our offshore delivery locations. We generated free cash flow of $11.9 million during the quarter, compared to $3.7 million during the second quarter of 2007.

Regarding our business outlook, as we discussed several weeks ago, we expect 2008 revenue will grow at a minimum of between 6% and 8%. Our operating margin in 2008 is expected to range between 9% and 10%, excluding unusual charges.

In conclusion, we are pleased to again post financial results that confirm our industry leading position. We believe demand for our services will remain strong and our significant new business wins will drive continued top line growth.

With that, I will turn the call back over to Ken.

Kenneth D. Tuchman

Thank you, John. In conclusion, we are very pleased with our financial performance in the second quarter. We continue to enjoy strong demand for our expanding array of offerings, as demonstrated by our double-digit growth rates in the BPO business. We believe there’s no better way to demonstrate the conviction we have in our business than by aggressively buying our stock back. We will resume our share repurchase program in the coming days and believe it’s the best use of capital, given our stock is significantly undervalued.

We now open the call to your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Tobey Sommer of SunTrust Robinson-Humphrey.

Tobey Sommer - SunTrust Robinson-Humphrey

Thank you. I had a question for you about the nature of sales cycles right now and whether you are seeing any difference in those sales cycles from an industry perspective or a geographic perspective -- any kind of color you could give there would be terrific. Thank you.

Kenneth D. Tuchman

I think that thus far, I mean, this is something that we are obviously looking at on a weekly basis but thus far, we think the sales cycle is pretty much in the six- to nine-month range and is really for the most part unchanged. That said, we are in the summer months and so things tend to slow down a little bit but then they accelerate towards getting to the end of third quarter, at least that’s been our historical path. And so we have reason to believe that there is plenty of business out there right now and are focused on converting it.

Tobey Sommer - SunTrust Robinson-Humphrey

Thank you, and then two other questions and I’ll get back in the queue; returns on capital are very high right now. I was wondering if you could give us a sense for perhaps where you think they could go from here. And then I had a question about your I guess philosophy as far as your comfort level with debt and how much -- you know, you are pretty under-levered right now -- how much you are willing to take on and any kind of parameters you could share with us would be terrific. Thank you.

John R. Troka Jr.

Relative to your first question on our return on capital, we believe that we can sustain a rate between 30% and 33% as we continue to invest in our infrastructure going forward as the company is growing. As far as to your second question and the level of debt, we are comfortable right now with the debt we are carrying but do believe that obviously with the cash flow of the company that we could lever the business up one to four times EBITDA.

Tobey Sommer - SunTrust Robinson-Humphrey

That’s a pretty wide range. Anything more specific over the near term, given the [inaudible] authorization?

John R. Troka Jr.

You know, I think that we are right now being very opportunistic and looking to see what our opportunities are and at this point in time, we believe the best thing we can be doing is acquiring our stock but at the same time, there might potentially be some other areas that could be viewed longer term as strategic as well, and so we want to keep our options open.

Tobey Sommer - SunTrust Robinson-Humphrey

Thank you very much.

Operator

The next question is from Bob Evans from Craig-Hallum Capital.

Bob Evans - Craig-Hallum Capital

Good morning and thanks for taking my call. First on the -- John, on the SG&A side, it looks like SG&A was down nicely year over year, especially if you back out the one-time expense. Is that kind of the right run-rate to use going forward, or how should we think about that?

John R. Troka Jr.

From a run-rate perspective, there are a couple of things that are in the second quarter. Obviously the equity-based compensation expense came down, which is primarily an SG&A item. We did also enjoy a benefit from a reduction in our healthcare and workman’s compensation expense in the second quarter, and that’s for the U.S. That is based on actuarial studies that are done semi-annually where we adjust the expected liability, so that contributes to the reduction.

So I would anticipate going forward something in the 13% to 14% range is where we will be for SG&A as a percent of our revenue.

Bob Evans - Craig-Hallum Capital

Okay, and the healthcare benefit, if you will, can you give us a sense of magnitude there?

John R. Troka Jr.

That was $2.3 million, and again it was healthcare, workman’s comp, as well as in our other equity, or our other insurance lines.

Bob Evans - Craig-Hallum Capital

Okay, so more of a true-up there?

John R. Troka Jr.

Yeah, and again, that occurs every six months so to the extent that there’s a change, we’ll have that change again in the fourth quarter.

Bob Evans - Craig-Hallum Capital

Okay, fair enough. And also, on the international business, it looks like -- you know, your revenue was up year over year, your operating income was down somewhat year over year. Can you give us a little color as to what maybe happened from an international standpoint? Just wondering about the variance.

John R. Troka Jr.

On the operating income side, it’s reflective of the restructuring that we had to do in a couple of countries. In Spain, we took some costs associated with movement of a particular center where we exited a leased in a large facility and moved it to a much smaller facility, and so again just continuing the program of working with clients to make sure we can get the profitability we need. If we can’t, we’ll exit that building and so there’s some -- program and there’s costs associated with doing that.

Bob Evans - Craig-Hallum Capital

Okay, and I believe you said 6,000 to 7,000 seats this year. How much -- how many are moving from North America to offshore?

John R. Troka Jr.

The 6,000 to 7,000 seats that we are building will be net new and will be all predominantly offshore. We did add some seats in the U.K., which obviously is not one of our offshore markets but the bulk of them will be in offshore locations.

Kenneth D. Tuchman

We have a conscious plan to take out approximately 1,000 workstations a year in North America and somewhere between 1,000 to as high as 1,500, and I think that we will be on track to accomplish that.

Bob Evans - Craig-Hallum Capital

And those seats that you are taking out, are they being taken out or are they transitioning to offshore?

Kenneth D. Tuchman

Well, in most cases they are transitioning to offshore and we are coordinating them simultaneously with sunsetting leases, et cetera.

Bob Evans - Craig-Hallum Capital

Okay. And how should we look at -- I know you don’t give specific guidance but how should we look at Q3 relative to Q2 from a seasonality standpoint or trend standpoint, both from a revenue and margin standpoint?

John R. Troka Jr.

I think that we are comfortable with the guidance that we put out there from a growth standpoint and we are going to stick with that for now and we think the margins are going to be in a similar kind of range that we also communicated, so we don’t see really any changes there. But we are feeling very good and yet of course we always try to be conservative.

Bob Evans - Craig-Hallum Capital

Okay, but should we view -- I know there is seasonality with Europe. Should we view from an operating margin standpoint sequentially down somewhat there, just due to Europe and maybe not that one-time benefit of the healthcare?

John R. Troka Jr.

The answer is yes, slightly.

Bob Evans - Craig-Hallum Capital

Okay. All right, thank you.

Operator

The next question is from [Gene Shirpa].

Gene Shirpa - Analyst

Good morning. I had two quick questions; one is we’ve seen a couple of acquisitions on the automated customer care space over the past month or so. Is there anything that you are seeing from your clients as it relates to that and how is TeleTech positioned in the event that that is a growing trend?

Kenneth D. Tuchman

We’re actually not seeing a huge trend in that area. As a matter of fact, that was a trend that was taking place more about five years ago than now. We’re seeing that the majority of the clients that are more focused on a high quality experience are actually looking to have live humans interface and interact more with their customers, where they can truly ensure that they are satisfying them as well as look for every opportunity to potentially grow revenue through upselling and cross-selling.

We’re seeing the business that’s a little bit more on the transactional side, which is business that we are typically not focused on, it tends to have more of a front-end IVR capability but we’re targeting business that tends to have more of a high-touch approach. That said, of course, we have a complete compliment of very sophisticated voice recognition IVR capabilities and we do have clients using it all over the world. But at the end of the day, it’s -- even when you are doing large volume because the billable rate is so low, it’s really an insignificant part of our business so we don’t view it as anything that’s a huge focus of ours, nor do we plan on it being a huge focus of ours.

Gene Shirpa - Analyst

Okay, great, and then just one follow-up question on the guidance -- if we take the midpoint of the full year range, call it 7%, that’s basically going to imply less than 5% year-over-year growth in the second half, or 6% excluding Newgen. Given that your new contract ramps at the 12-month rate should start to kick in at east by 4Q, how much of this is kind of conservatism or has the base of volume kind of slowed to the extent that it’s offsetting the new customer ramps?

Kenneth D. Tuchman

Well, if I heard your question, or if I understand your question, I should say, there is seasonal adjustments to volume and we did tell you that we had approximately six clients that volumes slowed they said due to the economy. So we believe that business that we more recently sold will be the business that ultimately back-fills that business and that said, because the business is taking nine to 12 months to ramp, unfortunately we can’t just fill it instantaneously. The good news is that we are building a great long-term reoccurring backlog of revenue but sometimes there’s just a timing differential and it’s just a few quarters or so where you kind of get that lag as you are back-filling into the business where the volumes dropped.

Now that said, this economy, as negative as I’ve been on the economy, we’re actually seeing signs that things might be potentially improving. And if that in fact were to happen, then we would fully expect the majority of the volumes that have been reduced to come back, which would put us in even a better position when you couple that with the long-term business that we’ve been signing quarter after quarter after quarter and all that layering on.

John R. Troka Jr.

I think the other thing you need to know is that we are obviously continuing our active program to manage our client relationships and again, those unprofitable clients and client programs we have we continue to manage out of the business, regardless of our top line growth rate. If it’s bad business, we obviously would prefer not to have is, so we will continue at a rate similar to what we have discussed before.

Operator

The next question is from Matt McCormack with FBR.

Matt McCormack - Friedman Billings Ramsey

Good morning. In terms of the new business signed during the quarter, the $65 million, could you provide a little more detail on the size of those deals, the verticals, and how the sales cycles progressed throughout the quarter?

Kenneth D. Tuchman

Sure. Sorry, we’re just flipping to a page on that. Okay, so you know, I’d say that there were four larger wins, some in the technology area that were average size, some in the consulting area as it relates to working with large global consulting companies, and some in the com and media area, both telecommunications as well as media area, and some in the healthcare area. Pretty much that’s where we saw the new adds for this quarter of clients that we are now ramping.

As for third quarter, we believe that third quarter signings will be up over this quarter and are very pleased with the pipeline as to what we are in the process of converting and hence it’s giving us confidence to build the amount of workstations that we are building now offshore.

Matt McCormack - Friedman Billings Ramsey

Okay. In terms of the peer group, I mean, most have said they are being affected by the economy in some way or the other. Could you talk about the current pricing environment and if pricing still remains rational?

Kenneth D. Tuchman

I believe the pricing does remain rational. I believe that all of the legitimate providers are in a very aggressive mode right now to increase their pricing due to their input costs have gone up, and I think with the flight to quality by our clients, they are fully understanding that there is a need for vendors such as ourselves to raise our prices, and thus far we are getting very little push-back.

So as I’ve said to you multiple times, the marketplace is truly bifurcated. There’s a few providers that have the overall capability and have the reputation of execution and they are commanding a higher price because they have higher costs since they’ve got deeper management. They are hiring better employees and they have more technology and more infrastructure and clients don’t want to get caught in a situation where their quality is falling off, and so we have recently enjoyed the ability to bring our prices up in areas where we’ve seen increased costs.

Matt McCormack - Friedman Billings Ramsey

Okay, and then my last question, in terms of your offshore revenue, it looks like that was down sequentially and I think that’s the first time we’ve seen that happen. Has your business offshore reached the point where we should now start to see seasonality with it, or was there any specific program that might have ended that could have caused that?

Kenneth D. Tuchman

No, I don’t think you should read anything into that at all. I think the only thing that maybe is just skewing the number is this is a historical legacy thing about our business, which is that Canada was included in our offshore, and so Canada will be shrinking but we are still growing very rapidly in places like Costa Rica and Mexico and the Philippines, et cetera. So no, I wouldn’t come to that conclusion at all -- to the contrary.

Matt McCormack - Friedman Billings Ramsey

Okay. Thank you.

Operator

The next question is from Shlomo Rosenbaum from Stifel Nicolaus.

Shlomo Rosenbaum - Stifel Nicolaus

Thank you very much for taking my call. In the press release, you indicate you are going to have a strong bookings quarter in 3Q. Last year on the 3Q side, about $100 million. Are you expecting a similar type of number?

Kenneth D. Tuchman

I think that’s in the realm of possibility. I think to give more than that would be giving you guidance and we don’t do quarterly guidance.

Shlomo Rosenbaum - Stifel Nicolaus

So that implies you are either very, very close or you have already signed a lot of that business so far?

Kenneth D. Tuchman

That could be the case.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. How many -- could you go over the gross versus net new workstations added in the second quarter?

Kenneth D. Tuchman

Yeah, 2,400.

Shlomo Rosenbaum - Stifel Nicolaus

And that was a net number?

Karen Breen

No, it was a gross number.

Kenneth D. Tuchman

Gross number.

Shlomo Rosenbaum - Stifel Nicolaus

Okay, and the net number was? I’m sorry.

Karen Breen

There really wasn’t a lot taken out in the second quarter. There’s always some movement but there shouldn’t have been a lot taken out.

Shlomo Rosenbaum - Stifel Nicolaus

One more housekeeping, and then I’ll sneak in one other question; could you go over what your level two assets are? Are those currency contracts or something like that?

Karen Breen

The level two assets are related to the [inaudible].

Shlomo Rosenbaum - Stifel Nicolaus

Excuse me?

John R. Troka Jr.

They are our derivative assets -- the hedging instruments and the like that we are using.

Shlomo Rosenbaum - Stifel Nicolaus

Okay, and then I’ll ask one more and just get back in the queue -- Ken, the level of repurchase authorization is definitely a vote of confidence in the cash flow of the business, but the ultimate vote of confidence in the cash flow of the business would be a take private offer over here. Even with the debt environments where they are and the credit environments, given the amount of stock that you own, you could -- and the fact that you guys are trading probably on a 2008 basis between four and four-and-a-half times EBITDA, why don’t you just try to take the company private?

Kenneth D. Tuchman

At this point in time, I would say that we understand that we have many options and many opportunities and when the time is appropriate, we’ll explore all of them. But right now we think the best option for our shareholders is for us to invest in our own stock. You know, things change and we’ll see where things go and for now, I would say that we are going to stick with the plan of repurchasing of shares. But you know what? You never know what’s going to happen in the future in this crazy market.

Shlomo Rosenbaum - Stifel Nicolaus

Okay, thanks a lot.

Operator

The next question is from Tom Smith from First Analysis.

Tom Smith - First Analysis

My first question is a follow-up on the new business. You had mentioned that it was better than what you had expected. Can you talk about what you had targeted for the quarter, and maybe also what new business signings were in Q2 of last year?

John R. Troka Jr.

I think our internal number goal was right around $50 million, and that -- so that’s -- we were happy to see that we came in above our goal and we are pretty comfortable that the third quarter is usually a strong signing quarter and therefore that we will be able to do better than that in the third quarter.

As for last year, we weren’t giving out that information last year and so frankly we weren’t tracking it and therefore I don’t have the information to give you.

Tom Smith - First Analysis

Just to follow-up on the international segment --

John R. Troka Jr.

Hello?

Tom Smith - First Analysis

Sorry, in the international segment you had pretty good results and I know you talked about this some already, but was there anything one-time in nature that would have benefited the revenue? I mean, were there any short-term programs that may have boosted it for the quarter?

John R. Troka Jr.

I don’t believe so.

Tom Smith - First Analysis

Okay. And then just a follow-up on the workstations, what was the -- you said 2,400 gross adds in Q2. What was the number of gross adds in the first quarter?

Karen Breen

200.

Tom Smith - First Analysis

200 gross adds?

Karen Breen

Yes.

Tom Smith - First Analysis

Okay, great. Thanks a lot.

Operator

The next question is from Josh Vogel from Sidoti & Company.

Josh Vogel - Sidoti & Company

Good morning. Thank you. Just building off of some of the earlier questions on the international business, I know the last couple of quarters you mentioned there were some restructuring costs and what not, but I was curious as we look out over the next six months, now that you are back to profitability there. What should we expect the margins to come in at?

John R. Troka Jr.

So the question is guidance on the next six months?

Josh Vogel - Sidoti & Company

Just do you think that margins are going to be up sequentially off of what you did in Q2?

John R. Troka Jr.

Is that international or --

Josh Vogel - Sidoti & Company

International, yes.

Karen Breen

Josh, there is typically in Europe we do get a little bit of softness related to both revenue and margins in the international segment. There is a little bit of compression of margins from the addition of seats in South Africa and some of the other sites but over time we should expect those to improve. And there were the restatement related costs that [we put in the] international segment and year-to-date those were probably $2.6 million for the restatement related costs.

Josh Vogel - Sidoti & Company

Okay, and on the last conference call, you discussed that your long-term operating margin goals, if we look out at 2011 would be 12% to 14% for the whole business but what are your long-term goals for the international business?

Karen Breen

It’s almost better at this point to look at them in aggregate because of the way we do both transfer pricing and management of various [inaudible] for tax related reasons, you are almost better to consolidate them and look at them as a whole.

Josh Vogel - Sidoti & Company

Okay. Now, I’m just trying to get a better sense of the volume that you are planning to migrate over the next several quarters. These migrations are not -- you know, they usually roll out with a lot of expenses here. I was just curious that absent the migration, do you have an idea where that would put your operating margin guidance today?

John R. Troka Jr.

I don’t think we have done a cut on the numbers that way. I understand your question. What I would just say to you is that there is obviously a cost when you are migrating business from one country to another country. That said, there’s a long-term benefit that far outweighs the short-term costs, which is that the margins tend to be significantly higher.

Josh Vogel - Sidoti & Company

Okay. Could you maybe quantify in percentage of volume maybe in terms of revenue or total hours of volume that you are planning to migrate?

John R. Troka Jr.

No, I would just tell you that it’s not anything to lose any sleep over. My guess is between now and the end of the year, it’s no more than probably we’ve already migrated, so maybe a thousand workstations and that, for a company of our size with 55,000 employees, that’s something that we can absorb.

Josh Vogel - Sidoti & Company

Okay, great. And just lastly, it looks like revenue from Sprint was down 13% sequentially. I was just curious if this was just some seasonality with their business or perhaps a negative volume trend that’s developing here.

John R. Troka Jr.

So the question is, I’m sorry?

Josh Vogel - Sidoti & Company

Basically the relationship with Sprint -- revenue from Sprint was down 13% sequentially, which is kind of a big drop here and I was just curious if there was seasonality in their business or if volumes are coming down and you expect them to continue to be down over the next several quarters.

Kenneth D. Tuchman

No, the Sprint business is fine. The only reason why you are seeing revenue down, this is something that we did budget for. It was the planned exiting of certain business in Canada that was not profitable for us and so we actually requested that we could get out of this business and we’re very happy that we did. And I think what our investors should understand is that because we so proactively manage the clients that are not profitable, it’s what’s allowed us to really maintain the level, the improving profitability and the levels of profitability that we’re seeing and frankly the rest of the industry isn’t seeing right now.

Josh Vogel - Sidoti & Company

Okay. That’s all I have. Thank you.

Operator

The next question is from Eric Boyer from Wachovia.

Eric Boyer - Wachovia

Sorry if I missed your comments -- any thoughts on People Support being acquired here and future M&A activities?

Kenneth D. Tuchman

We applaud all companies that acquire or merge with small companies. We think this industry historically has been plagued with way too many small players that have basically become somewhat irrelevant and we have never competed with People Support, we never competed with Aegis, and we congratulate them on what I am sure is good for both of them.

Eric Boyer - Wachovia

And any thoughts for M&A for TeleTech, as far as you guys acquire here?

Kenneth D. Tuchman

Well, I mean, I think that again, we look at what’s out there and we are evaluating all kinds of opportunities, et cetera, and so we have an open mind but it wouldn’t be in the area of some of these companies, these smaller companies. That wouldn’t really be of interest to us.

Eric Boyer - Wachovia

Okay, and just general comments on wage inflation and voluntary attrition maybe [inaudible] in some of your other offshore geographies.

John R. Troka Jr.

Relative to wage inflation, specifically in the Philippines, I think we, as with others see wage inflation. Again, we’re in a situation where because of the site selections we’ve chosen, the provincial areas, that it’s not as impactful. When others follow that strategy and end up in the same locations we are, it does create a supply and demand issue, which does drive it a little bit but we are cognizant of it and we are working obviously diligently to address it. To the extent that it is something that takes place, that is where we are going back again to our clients and making sure they understand what is going on in the marketplace and seeking the right type of price increases to offset that.

Kenneth D. Tuchman

I think our clients are very sophisticated companies that operate globally and they are experiencing the same type of higher input cost in everything that they do, and therefore having a conversation with them about the increases in costs are ones that tend to be well-received and fully understood, and then it really turns into a negotiation of when those increases actually take place.

So we’re comfortable with where the portfolio is now and with the work that we have to do, which is part of the normal course of us running our business to continue to improve the profitability and we also believe that the customer mindsets are also in the same place because they understand that high quality and low attrition is ultimately what drives a better customer experience, so hopefully I’ve answered your question.

Eric Boyer - Wachovia

What about voluntary attrition though? Are you seeing an increase there?

Kenneth D. Tuchman

Voluntary attrition meaning someone leaving?

Eric Boyer - Wachovia

Right.

Kenneth D. Tuchman

I would say no; actually, to the contrary. Especially in the offshore markets, we are consistently ranked the employer of choice. We are consistently in a position where people want to come to work for us because of our training programs, et cetera. So we are really not experiencing I think the same level of attrition that some of the other providers are providing.

Eric Boyer - Wachovia

Thanks a lot.

Operator

We have time for one last call and that is from Ashwin Shirvaikar from Citigroup.

Ashwin Shirvaikar - Citigroup

Nice quarter. I apologize if these questions were asked. I was disconnected a couple of times. First question, were the seats that you added specifically linked to client signing, most of them, at least?

Kenneth D. Tuchman

Yes, they were.

Ashwin Shirvaikar - Citigroup

Most investors are already beginning to look at 2009 instead of what happens in the next five months here, so if the economy stays where it is, what kind of revenue growth might you anticipate in ’09, ballpark or even directionally? I know you might not give exact numbers but --

Kenneth D. Tuchman

So for 2009, I think that at this point, just because it’s -- you know, the economy is a bit of an unknown, I think that we are short-term, if the economy doesn’t change, the guidance would be what we put out there and then most likely towards the middle of 2009 when several of the deals that we’ve signed and have flushed through our system and they’ve ramped, we would potentially be in a position to change our guidance. But sans that, I really don’t see a lot changing from our existing guidance that we have out there, so I’d say that we are comfortable with what we have right now and then look forward to updating you guys.

Ashwin Shirvaikar - Citigroup

But what you have right now implies the second half much weaker, so that would imply that next year -- you take the second half and layer on, you know, increasingly layer on the contracts that you won.

Karen Breen

Well, part of it, Ashwin, is that as we said in the [inaudible], we modified the ’08 guidance. It’s not so much -- we realize that we would have good performance in the second quarter as we moved into the third and fourth of this year and felt that we were seeing some [process] with those clients as well as [in lower seasonal volume], so I think what Ken is saying is it’s a little bit too early now to try to give a specific range for guidance for ’09 but we are still comfortable with what we said for this year and as we get further along, we’ll try to update it as we get out there.

Kenneth D. Tuchman

You know, Ashwin, we’ve traditionally grown at close to twice the size of the industry, so obviously it pains us to have a guidance that is in the range that we currently have out there right now but we really want to be in a position where, regardless of what happens with the other providers, that we’re viewed with credibility throughout. And so we think that it’s more important that we demonstrate that we execute on what we say. This last quarter that we just reported I believe represents our 11th or 12th consecutive quarter of double-digit top line growth contiguously and we just want to make sure than when people look back, they say when these guys see something, they tell it the way it is, they execute on it, and when they see something new, they update and they execute on that. And at the end of the day, we’re really only as strong as our clients are, and so some of our clients are experiencing some lower volumes and the good news is that we are signing a fair amount of new business and so that will get us past them and far more diversified than even where we are today. But temporarily, while we absorb their new volume commitments along with the new business, you kind of have a temporary see-saw effect, and we would hope to, like I say, revise probably some time in the middle of ’09.

Ashwin Shirvaikar - Citigroup

Okay, and my last question is with the [inaudible] here, [inaudible] doing the buy-back but is management [buying stock] for themselves at these levels?

Kenneth D. Tuchman

I believe management is considering buying back stock at these levels. Any other questions, Ashwin?

Ashwin Shirvaikar - Citigroup

No, no, that was a perfect ending, actually.

Operator

This concludes the TeleTech conference call. You may disconnect at this time.

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Source: TeleTech Holdings Q2 2008 Earnings Call Transcript

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