Information Services Group Inc (III) 2008 Q4 法說會逐字稿

Good day. Welcome to the Information Services Group fourth quarter and full year 2008 earnings results conference call. Today's conference is being recorded.

At this time for opening remarks and introductions I would like to turn the conference over to Mr. Barry Holt. Please go ahead, sir.

Thank you. Hello. My name is Barry Holt. I lead communications for Information Services Group. I would like to wish you a good afternoon and welcome everyone to ISG's fourth quarter and full year 2008 earnings conference call. I'm joined by Michael Connors, Chairman and Chief Executive Officer; and Frank Martell, Executive Vice President and Chief Financial Officer.

Before we begin I would like to read a forward-looking statement. It's important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed listing of the risks and other factors that could affect future results please refer to the forward-looking statement contained in our Form 8-K furnished this morning to the SEC and the risk factors section in ISG's Form 10-K covering fourth quarter and full year results which will be filed Friday, March 13.

You should also read the ISG annual report on Form 10-K for the fiscal year ending December 31, 2007, and any other relevant documents, including any amendments or supplements to these documents, filed with the SEC when they become available. You will be able to obtain free copies of any ISG's SEC filings on the SEC website which is www.SEC.gov. ISG undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please use our current report on Form 8-K submitted this morning. You will have an opportunity at the end of the presentation to ask questions. And now I would like to turn the call over to Michael Connors who will be followed by Frank Martell. Mike.

Thank you, Barry, and good afternoon, everyone. Thanks for joining us. Today Frank and I will recap ISG's fourth quarter and full year 2008 results and outline the progress from a business and a financial perspective that ISG has made during 2008.

I'm sure it goes without saying that economies in the US and increasingly the rest of the world experienced unprecedented turbulent economic downshifts during the past year. Recessionary pressures gathered steam throughout 2008 as they cascaded across geographic borders and into almost every industry vertical that we operate in. Despite unprecedented levels of government intervention from the fiscal stimulus programs to direct capital infusions into major banking and insurance firms, the breadth and depth of the recession clearly intensified in the second half of 2008.

As we discuss together on our earnings call throughout 2008, we continuously monitor the possible impacts of the unfolding turmoil on our business, and we will continue to do so in the days and months ahead. In challenging markets, we believe it is important to leverage our industry leadership and focus on profitable revenue growth in our core businesses. With regard to building our core franchise, we continue to reinvest in new products and services and drive relentlessly for cost productivity and best-in-class operating metrics. These efforts we believe are central to achieving our current year objectives and our longer term strategic plans.

Most companies in this environment are looking to reduce costs and improve their competitiveness. With our sourcing information and expertise conducted a record number of strategy and assessment engagements for our clients this past year. Primarily in response to their urgent need to get more cost efficient and to do so quickly. The increased level of strategy, analytics and assessment work has not as yet translated into increased levels of sourcing transactions as many clients particularly in the US have deferred decisions and/or adopted a more tactical approach to decision making in the short term related to sourcing. We continue to believe many of these clients will eventually move ahead with decisions on major sourcing transactions because the ROI is just too compelling.

For the past 25 quarters, the TPI index has been the authoritative voice on the sourcing industry's overall development and key trends. Our information shows that 2008 was a solid year in terms of the number and value of sourcing contracts awarded. The total contract value or TCV associated with sourcing deals closed in 2008 total almost $90 billion. Which translates into an annual contract value or an ACV of about $17.5 billion.

The industry slowed in the second half of 2008 after a very strong run from late 2007 until the middle of 2008. The principal reason for the slowdown was a reduction in a number of what are called mega deals, typically TCV of over 1 billion or an annual value of over 100 million. Consummated in the second half compared with the first half of '08.

During the first half, for example, in 2008 there were 12 mega contracts awarded with total contract value of about $17 billion compared with only three transactions with a TCV of about 6.5 billion in the second half of the year. I think this reflect the comments I discussed previously that many companies are either deferring or adopting a more short-term tactical approach at that time moment to sourcing decisions. For the year ended December 31, ISG delivered record levels of revenues, adjusted EBITDA, liquidity, and cash earnings per share as we continue to help our clients to become more efficient and competitive.

Compared to 2008 revenues were up 1% as a 13% jump in local currency revenues in Europe and Asia Pacific more than offset unfavorable currency translation and an 8% contraction in the Americas. Our 2008 adjusted EBITDA rose 35%, and we increased our cash balances by almost 30%. And year to date diluted cash earnings per share have jumped more than twofold. Strong international revenue growth, aggressive management of our costs and intense focus on operating productivity funded continued significant investments in new products and services, including new businesses, TPI momentum and TPI governance services which we believe continue to gain traction in the marketplace. These new service offerings as well as continued investments in our geographic expansion and our existing core business will support sustainable organic growth and further margin improvements. We believe that our global leadership and geographic footprint have positioned us to manage through the current economic downturn and support our clients' needs to drive improvements in their key technology and business operations.

As I have stated previously, our vision is to build a world-class, industry leading information based services Company. We believe it key to achieving our vision is sustained best in class margins. We committed early on to you to improving our 2007 EBITDA margins of just under 12% by about 200 basis points each year for the next several years. While in 2008 we delivered a 400 basis point increase. This better than expected result is attributable to the fact that we focused and rewarded the organization on profitable, higher margin business that we believe the premium TPI brand supports.

In addition, over the balance of the past year, we successfully introduced leverage into our workforce and reduced underutilized advisers. We also improved our pricing practices and drove productivity in our sales, general and administrative costs which fell as a percentage of our revenues.

Throughout 2008 ISG has continued to expand our industry vertical penetration and expertise. We invested in a dedicated industry vertical sales and service teams in the US and most recently have done so in Europe. Globally we recorded increased revenues in manufacturing, media, telecom, healthcare, the public sector, consumer businesses, and business services. Revenues declined in the financial services and energy verticals compared with the same period a year ago.

From a geographic perspective our Europe, Middle East and Africa, or EMEA region and Asia Pacific had outstanding growth in the fourth quarter and full year of 2008. The sourcing is market in these regions has remained more buoyant than in the US and our global market leadership allows us to capitalize on strong client demand. Over the past 12 months, we expanded our geographic reach by penetrating deeper into Asia Pacific and continued our push into Europe to take advantage of organic growth opportunities. And the results were there. In 2008 these regions grew 15% year on year, and contributed about 45% of ISG's total revenues, up from 39% in 2007.

As I mentioned previously, we continue to experience sizable head winds on the top line in our Americas region. After growing about 3% in the first half of last year, revenues in the Americas contracted approximately 18% in the second half. Although we are seeing a steady stream of smaller more tactical transactions, revenue growth continued to be impacted by longer decision making cycles and companies in the US deferring major sourcing decisions as they assess the macro economic conditions and its implications.

In 2008 we've made important progress in diversifying our revenue streams beyond our traditional strength in financial services and manufacturing and into additional industry verticals where demand for sourcing is emerging. As I mentioned earlier, we also developed and launched important new products and services this past year. In late September, we formally launched TPI momentum. Our new distinct business unit dedicated to providing information and insights to outsourcing and offshoring service providers to help them provide enhanced services to their sourcing clients. Initial indications and interest from the service providers have been most encouraging.

In addition, we expanded the scope of our new TPI governance services business, which is focused on helping our clients to mediate cost leakage and achieve the quality and performance service levels contemplated under the service provider agreements. To date, we have signed two major contracts collectively totaling almost $10 million to supply ongoing post contract management services to two major US-based multinationals. With well over 2700 active sourcing arrangements around the globe, post-contract management and governance is expected in the area of predictable revenue growth for ISG as we move through 2009 and beyond.

Our market leadership emanates from our world-class roster of loyal blue chip clients. During 2008 we added significant value to over 300 unique clients across eight major industry verticals. During the past 12 months our advisers have been involved in the most significant client ITO and multifunction engagements that have been done across the globe. The roll call of significant client engagements from 2008 is extensive so I will only highlight a few.

In the Americas, we conducted major assignments with companies such as Symantec, Starwood Hotels, UPS, Northrop Grumman, Eli Lilly, SunTrust Bank, the State of Georgia, and two of the big three Detroit automakers. In EMEA we secured very significant engagements with the Bank of Ireland, Alliance, Deutsche Post, Zurich, British Petroleum, Royal Dutch Shell. SAB Miller, the Moorely fund, the Prudential and Volkswagen, to name just a few. In Asia Pacific we secured the largest engagement in the region's history with the Australian tax office as well as important new business with Aviva in southeast Asia and Nissan in Japan.

Despite all of the challenges and head winds we believe ISG executed against its goal to develop a more profitable and focused Company in 2008. In the face of extremely challenging and volatile economic times, we diversified our revenues into a greater number of industry verticals, launched two important new businesses, grew our international operations double digits, expanded our margins, and achieved record levels of liquidity. We remain excited about the future and have an aggressive program for 2009 as well as our longer range strategic plan. We believe ISG is well positioned to provide our clients with must-have advisory and data services to help them improve their operations and navigate through the current economic cycle.

As we move forward we will continue to watch the global economic uncertainty and the impact on client decision making. We have a global footprint, and we are taking advantage of growth opportunities that are at hand while managing through a tough environment in the months ahead. Let me now turn the call over the Frank Martell who will summarize for you our financial results for the fourth quarter and full year.

Thank you, Mike, and good afternoon, everyone. Just a few comments before I get into the financials, just to make things clear. ISG completed the acquisition of TPI on November 16, 2007, for the periods prior to the acquisition ISG was a special purpose corporation and therefore had no operations. To facilitate a full analysis of our financial performance ISG has presented GAAP financial results as well as certain non-GAAP information in our earnings release. To ensure appropriate comparability between 2008 and 2007 pro forma results have been prepared for the fourth quarter and full year of 2007 on the basis of the acquisition of TPI had occurred on January the 1st, 2007. I will focus primarily on ISG's pro forma results this afternoon.

In addition, I will also discuss certain non-GAAP financial measures which exclude noncash and other special charges. We believe that providing these non-GAAP measures improves the comparability of the Company's financial results between periods and provides for greater transparency of key measures used to evaluate our performance. The non-GAAP measures I will touch on today include first, adjusted he EBITDA which is defined as net income plus income taxes, net interest income expense, depreciation, amortization of intangible assets, and noncash impairment charges for goodwill and intangible assets.

Second, cash earnings, which are defined as net income plus amortization of intangible assets, noncash stock-based compensation and noncash impairment charges for goodwill intangible assets. And finally, I will present selected financial data on a constant currency basis using foreign currency exchange rates as of November 16, 2007.

A complete reconciliation of the non-GAAP financial measures is included in our earnings release which was furnished to the SEC this morning. Non-GAAP financial measures are provided as additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.

As Mike mentioned, ISG has not been immune from the unprecedented financial and economic turmoil that's gripped most of the world, especially the US for much of 2008. In terms of top-line growth, it was very much a tale of two halves. Double-digit increases in the first half followed by a contraction in the second half. Overall for the full year we grew the top line by a little over 1%, 2% excluding FX, and we continue to grow at double digit rates in our European and Asia Pacific regions. Primary challenges to growth came in our Americas region as well as from unfavorable currency translation impacts during the fourth quarter in particular.

Importantly, however, we were able to significantly increase profitability levels during the year through an aggressive drive for operating efficiencies. We improved gross margins, we enhanced the leverage of our billable resources and we carefully managed our SG&A spending levels. This allowed us to generate record profit levels and cash flows despite second half easing in our top-line growth rates. This increased profitability allowed us to continue to reinvest in our core business, and we believe this will generate significant future profitable revenue growth.

ISG reported revenues of $37.4 million during the fourth quarter of 2008 compared to $43.1 million in the fourth quarter of 2007. This represents a decrease of $5.7 million or 13%. Before the impact of currency translation, revenues were down approximately 5%. Fee revenues, which are revenues before client reimbursable expenses, decreased 13% year on year to $34.4 million. Revenues from international operations decreased 4.7% from pro forma fourth quarter 2007 levels as unfavorable impact of currency translation more than offset underlying demand for strategy assessment and contract negotiation services in Europe and Asia Pacific. Fourth quarter 2008 revenues in the Americas were down 19% year on year, primarily due to current and prospective clients deferring sourcing decisions.

ISG reported revenues of $174.8 million during 2008. On a pro forma basis, ISG revenues increased $2.1 million or 1.2% from $172.7 million in 2007. Excluding currency translation impacts revenues increased $2.2 million from pro forma 2007 levels. Fee revenue increased 1.6% year on year to $160.9 million compared with pro forma 2007 levels. Again, revenues from international operations increased 14.8% driven by strong demand from clients in the manufacturing, telecommunications, and consumer industry verticals offset partially by softness and or timing in the financial services and industry verticals.

Revenues in the Americas were down 7.6% for the year, because current and prospective clients, particularly in the financial services and automobile sectors deferred sourcing decisions, particularly in the second half of the year. ISG ended 2008 with 216 active client engagements, up 10% from 196 for the same prior year period. During 2008, ISG worked on a total of 659 client engagements up 11% from 2007. Consistent with levels seen in past years approximately 75% of our 2008 engagements came from existing or former clients reinforcing a continued high level client satisfaction and loyalty.

In terms of profitability and margin rates ISG's reported GAAP results for both the fourth quarter and the full year of 2008 reflected an impairment charge of $74.2 million for the impairment of goodwill and intangible assets. The noncash impairment charge resulted primarily from the sustained decline in the market value of ISG's common stock during the fourth quarter, as well as the challenging macro economic factors impacting industry conditions and actual results. Including the impact of the $74.2 million impairment charge, ISG reported a $70.9 million operating loss for the recently concluded fourth quarter. Fourth quarter 2008 operating income totaled $3.2 million before the impairment charge. This was up from a pro forma fourth quarter 2007 income of 2.8 or up $4.1 million from a reported fourth quarter 2007 operating loss of $900,000.

Before the impact of the noncash impairment charge and currency translation, ISG's fourth quarter 2008 operating income aggregated 43.9 million, increase of 58.2% or $1.4 million from pro forma 2007 levels. For the full year of 2008 ISG reported a $57.6 million operating loss. Excluding the impairment charge, operating income for 2008 totaled $16.5 million, a $6.4 million or 64% increase versus 2007 levels of $10.1 million. Before the impact of the non impairment -- noncash impairment charge and currency translation, our 2008 operating income totaled $17.4 million an increase of 66% or $6.9 million from pro forma operating income for the same 2007 period.

Fourth quarter 2008 earnings before interest, taxes, depreciation, amortization, and noncash impairment charges, or adjusted EBITDA, which is a noncash -- a non-GAAP measure, totaled $5.6 million, which is 16.3% of our fee revenues. Compared with a pro forma fourth quarter 2007 adjusted EBITDA of $5.3 million. Excluding the impact of currency translation adjusted EBITDA increased 27% from pro forma fourth quarter 2007 levels.

During the fourth quarter of 2008 ISG adjusted its definition of EBITDA to account for the impact of the impairment charge to ensure appropriate levels of comparability of the Company's operations. Adjusted EBITDA for the full year 2008 totaled $27.1 million, or 16.8% of our fee revenue. This is an increase of $7 million or 35% from pro forma 2007 adjusted EBITDA of $20.1 million. Excluding currency translation impacts, adjusted EBITDA increased $7.5 million, or 36.4% from pro forma levels in the same prior year period.

Significant increases in both operating income before the impact of the fourth quarter impairment charge and adjusted EBITDA in 2008 resulted primarily from double-digit international revenue growth, higher gross margins, and general and administrative expense productivity which were partially offset by the impact of decreased Americas revenues, increased stock-based compensation, and higher public company related costs. Diluted cash earnings per share for the fourth quarter 2008 was $0.10 compared with $0.06 for the fourth quarter 2007 on a pro forma basis, which is a 70% increase. Diluted cash EPS for the full year 2008 aggregated $0.55 compared with a pro forma diluted cash EPS of $0.22 for the comparable 2007 period. The more than twofold increase in diluted cash earnings per share in 2008 versus 2007 was primarily attributable to higher international revenues, increased gross margins as well as the impact of ISG's share repurchase program and lower taxes offset partially by lower Americas revenues and higher public company costs.

Finally, from a financial perspective, ISG continues to improve its already strong liquidity position to support the implementation of our strategic business plan. ISG's cash and cash equivalents aggregated $61.1 million US dollars, at December 31, 2008, which was a net increase of $4.1 million from September 30, 2008, and 13.1 -- $13.9 million increase from year end 2007. These increases were primarily attributable to improved operating results, partially offset by capital expenditures, VCP related severance costs, term loan interest and principal repayments, and the repurchases of ISG securities. At year end 2008, ISG's total outstanding debt was $94.1 million. During 2008, ISG repurchased 7.9 million warrants and 158.5 thousand shares of common stock for a total of $3.4 million under our ongoing share repurchase program authorized in late 2007.

As Mike mentioned earlier, ISG remains focused on investing for profitable future revenue growth and on transforming cost base into a more flexible and leveraged model with higher utilization rates, enhanced price realization and tight management of SG&A spending. Over the past 12 months we have implemented a strong and cohesive management structure and launched several important new products and services. We've also proactively and aggressively drove for significantly a higher cost efficiencies and productivity levels in the business, and we have substantially increased our cash and liquidity levels. But continuing execution of our strategic plan remains our number one priority. Thank you all for your time today. Mike will now share some concluding remarks before we go to Q&A.

Thanks, Frank. Against the backdrop of one of the most challenging economic climates in memory, I think 2008 was a year of very strong accomplishments on many levels for ISG. We reinvested significantly in our new product and services. Our international revenues grew at a double-digit clip. The margins have been increased significantly and we finished the year with record cash balances. ISG's global leadership, our data driven product and services and our geographic footprint we believe it positioned us well to manage through this current economic downturn and support our clients' needs to lower their costs and drive business improvements in their key technology and business operations.

Our business model has now been reshaped in our first full year as a public company. We are focused on profitable growth. Our adjusted EBITDA increased by 35% and our margins are up over 4 percentage points. We remain the market leader in sourcing and data advisory services, and we are working hard to build on that leadership. When companies are considering sourcing strategies, we are there.

ISG remains committed to reach our objective to build a high-growth industry leading information based services Company. Our relentless focus on profitable revenue growth and achieving best in class performance levels is yielding significant margin improvements and supporting our increased level of investment in new products and services, which we believe will underpin our continued organic growth and achievement of our longer range business plans as we emerge into the post recession economy. We also continue to actively focus on evaluating potential acquisitions. Value enhancing acquisitions that add to ISG's existing business and services platform will remain at the core of our long-term planning, and we remain focused on it. Thanks again for calling in this afternoon, and now let me turn the session over to our operator to see if you have any questions.

Thank you. (Operator Instructions) We'll go first to Fritz Gallagher with Lazard Capital Markets.

Thanks for taking my call.

Hi, Chris.

Hi, it's Fritz Gallagher. I'm wondering what the demand for advisers is on the smaller, more tactical deals and what the opportunity for TPI is to take advantage of the shift in terms of market share gain or growing new services?

Okay, Fritz, thanks for the question. First, we are in a -- deeply involved in a lot of the kind of smaller time transactions, things that are under 20 million, $15 million a year, we do not spend much time on. But on the smaller size transactions, we certainly are spending time. The time right now is being spent around kind of helping them identify what their strategic position should be and what their assessment of their current kind of business as usual situation is, compared to all of our benchmarks in data and information and compare them and kind of create their business case for them. So whether it's a smaller piece of business or a larger one, we go through a similar process with the client. The amount of savings clearly that they have in terms of real dollars clearly is smaller at that time lower end but we do participate in that area.

Okay, great. And lastly, the clients that are delaying transactions what are they looking for or what will they need to see before they feel comfortable committing to a longer term engagement?

Good question. Look, I think what we're seeing right now is they are wanting anything they can get done in a very, very short time that can be accretive, they will do. What they think may take a little bit longer to get done, and when you go to a major transaction it takes a longer period of time, because it adds a bit more change into their organization, and with all the uncertainty in the markets and their business, et cetera, they are a bit reluctant to introduce that change. I think just a bit more confidence in what is happening in the markets, because the ROI from our standpoint, I believe from the client standpoints, they would say this is something we must do. The question is, is when do we trigger this. So I think it'all about confidence, and I think if there's a bit more confidence that they have, both in terms of the economy and the market, then I think they will trigger, but that's kind of what we see.

Great, thank you and good luck.

Thank you.

And your next question comes from Tim Fox with Deutsche Bank.

Good afternoon, guys.

Hi, Tim.

Nice execution on the margin front in '08. Question, a follow-on to the previous question around the timing of decisions. I'm wondering, are some of the deal push-outs due to, even though you've got high ROI, due to some of the capital expenditures that might be required up-front in the first six to nine months, maybe even 12 months to get some of these deals done? I'm wondering if you are advising any of the providers to think about utilizing their balance sheets or getting more creative in reducing that upfront cash outlay that clients ultimately have to put out.

Hey, Tim, it's Frank. How are you doing? Look, I think the -- that issue certainly is a discussion on a lot of deals, the structure of how the solution will be provided, including fronting capital and other near-term expenses. I think the challenge, as Mike said, I think in this whole area I think people, especially as unemployment has ramped up, and people are dealing with a lot of internal turmoil and major layoffs, I think those are bigger drivers than capital determinations. People are making decisions. As Mike said, we're doing a lot of assessments, which is good. Typically these will grow into big transactions. Some are and some are not.

I would say across the board, particularly in the U.S. the sell-in cycles are longer, as Mike mentioned, and I think that's not surprising, given just, again, how uncertain things are and a lot of people in financial services, there's a lot of internal organizations and change that has grown on in the last six months that I think make decision making slower and more difficult. So I don't think the solution or the -- or there will be a tremendous benefit from structuring deals to take CapEx off, but certainly those are discussions we have with every -- in every transaction with every client, depending on the situation.

And just to follow-on to that question, are you seeing any change, even if it's incremental, at all, in the behavior of the US financial services industry, any improvement at all now that things have progressed to the point where we are now, not that things have settled down, but any signs of loosening there?

Good question. I think there is. We are really active now in the financial services space over the last few months. I would say there's three areas in particular with everything that's been going on. They're looking at how they can integrate their software applications, if they've brought certain units together, or there's merging of certain pieces. What's happening with all the multiple data centers that multiple companies have had what about their trading platforms and how to deal with that. So there's a lot of work going on around these areas, in addition to, what we call our facilities in real estate management area, where there's some really kind of near-term accretive 2009 savings for them, they are also asking for our assistance in that area, and we have some projects going on there. So those are the areas that have some intensity around them, but definitely the financial services industry has picked up.

Encouraging. Just in looking out into '09, Frank, maybe you can address this question about -- in two different fronts. One, could you help us think about how FX will act year-over-year as we progress through '09 from a head wind perspective?

Yes, clearly we saw the impact for the fourth quarter. The first half of 2009, at the current spot rate, of course, the head wind will be very significant. I think not only for the fact that the currencies themselves have weakened, but also, Tim, as you can remember, we grew the top line and particularly the international units, very strong in the first half. So the cumulative ISG revenue growth for the first half of '08 was 13%. So we that had comparative to also deal with as well.

But having said that, we are still focused very much on double-digit international constant currency growth, and we are off to a good start from that perspective, and so we're still driving for dure dig local currency growth. But certainly the first half is going to be tough sledding on a currency -- with the dollar staying as strong as it is. That will moderate obviously over the third quarter, and particularly the fourth quarter of the year, but certainly the first six, eight months are going to be tough.

Okay, great. Lastly, and I will jump back in later, you've done, obviously, a large number of adjustments to the operating model utilization, SG&A. I'm wondering how many bullets do you have left to continue to take some cost out of the business, or at this point are you looking at just adding profitable revenue? Is there much left from the levers that you have been able to pull so far as we head into '09?

Let me see if I can jump in here, Tim, on a few of these. One is we think that the revenue mix, which will begin to evolve, I think during the second half, where we're adding in some annuity revenue streams, in governance services, in TPI momentum, where there are higher margin business, if you will, because you can in some ways syndicate some of it. Will be helpful. Two, I think the industry vertical expansion that we did, especially during the latter part of '08, will begin to serve our purposes going forward. And thirdly, I think just the culture where we've created a scenario where we don't want the low margin business. We think that the TPI brand has -- is -- can provide a premium in the marketplace. Our information we think is solid proprietary and others do not have it. And our global footprint all allow us, we think to begin and enable us again, over time to continue to expand the margins. I think we had said to you that we would shoot for an expansion of about 200 points a year. We were able to do about twice that in year one. And we believe over the next couple of years that there's further expansion that is there. Clearly that will have to evolve with the current head winds in the US and the kind of balancing that we're doing with our talent versus the demand. But we still believe that there is margin expansion to be had.

And there is -- there's always productivity in doing things smart on the cost side as well. So I wouldn't say we're out of -- we're dry on that side, either.

Okay, thank you both.

Thanks, Tim.

And our next question is from Brandon Dobell with William Blair.

Maybe some commentary on workforce retention, morale, those issues, particularly when the people that, when they're seeing is minor or major job role changes, just trying to get a feel for how from a personnel perspective you guys feel you're positioned when the business does start to come back?

Brandon, I think we believe we have a very energized workforce. Our team is very client centric, very client centered. It reflects on the kind of blue chip clients that we have had and the ones that we continue to be able to develop anew each year. We had over 100 new clients this past year. We put a new organization in place, as you know, well over a year ago. We focused the organization on profitability. We aligned our pay schedules to that and to creating value for shareholders over time. And we think that all of those bear fruit, and those that delivered were well rewarded. Those that fell short were not. And I think everybody feels good about how that pay structure was established. So from our standpoint, we have not had any -- anyone leave the organization that we wished had not, and we feel like we've got a solid team to continue to push forward, and especially emerge as the economy improves.

As we think about the next several quarters on the direct cost line, from a dollar perspective or from a margin perspective, which is the right way to start modeling that line? It seems like you guys have made a number of changes that are structural, and there's obviously some variability in that line, compared to revenue. Just trying to get a feel for if that -- let's call it the 19 million, $20 million in costs are the right way to model that line, or if it's more about the margin percentage that should be more accurate?

Brandon, I would go at it from a margin percentage perspective. We're -- we've driven it up into the kind of mid to upper mid 40% range on the gross margin side. We are continuing to focus on that area. We think that from a utilization perspective we have some opportunities. We made some good progress on the leverage. So there is some shifting of where the billable hours are coming from and who is doing them. But we see utilization as a big focus in 2009 and optimizing, that will be, I think an additional margin boost for us as we go forward.

Last couple quarters you guys had talked about the governance, product and service line, how it's ramped up. Any further updates there? And are you seeing any requests for inquiries or RFPs from people you didn't expect to see ask about that particular product?

The TPI governance services, as we said before, we think is a really robust growth area for us. We do have the $10 million now under contract, and we have a lot of prospects, and it's a little bit of a longer sales cycle, because normally what happens is as -- you get two kind of streams here, Brandon. One is the ones that are completely a transaction, and want to figure out how to deal with it, and others who have already done it and have it in house and are now looking to figure out, it's got to be able to be done better and more effectively with someone that deals with this every day like us. So we are going down both paths. We think both have opportunities for us, and nothing to report on any other new contracts, but we are very active in the market.

Okay. And then final housecleaning question for you, Frank. How do you guys think about DSOs and CapEx this year? Any major changes from what we saw in 2008?

We had a great -- we had absolutely great -- part of the cash improvement was collections. We really got our DSOs down to 60 days from over 70. Still some room for improvement, in my view. At least in my previous experience, but -- and we're working at that in '09, so we don't have any collectability issues. I think by virtue of the fact our clients are so blue chip, and we have everything is kind of -- nothing is past due, so we're in great shape right now, and expect to continue that.

On the CapEx side, any range we can think about for capitalized spending?

Same. I'd say 2 million to $3 million.

Okay. Great. Thanks, guys.

Thanks, Brandon.

(Operator Instructions) And we have no questions at this time. I will turn the call back over to Mr. Mike Connors for any additional or closing comments.

Okay. Well, listen, thanks very much, and let me close by first thanking our more than 450 professionals for their dedication to delivering just an absolute great 2008 despite a very challenging economic climate, and to all of you, our investors for your continued trust and confidence in our team. We're hard at it and we'll continue at it. So thanks again, and thanks for calling in today.

And that does conclude today's conference call. We thank you for your participation.