Innodata Inc (INOD) 2007 Q3 法說會逐字稿

Good morning and welcome to the Innodata Isogen third-quarter 2007 earnings release conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vice President of Marketing and Communications, Al Girardi. Please go ahead, sir.

Thanks, Greg. Good morning and thank you for joining us on our third-quarter 2007 earnings conference call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen, and Steve Ford, our company's Chief Financial Officer.

Statements made during this call and answers to your questions are intended to provide abbreviated, unofficial background to assist you in your review of the Company's press release and SEC filings. In addition, there may be some forward-looking comments regarding the Company's operations, economic performance and conditions. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The words believe, expect, anticipate, indicate, point to and other similar expressions generally identify forward-looking statements, which speak only as of their dates. These forward-looking statements are based on the Company's current expectations and are subject to a number of risks and uncertainties, including, without limitation, continuing revenue concentration in a limited number of clients; continuing reliance on project-based work; worsening of market conditions; changes in external market factors; the ability and willingness of the Company's current clients and prospective clients to execute their business plans, which give rise to requirements for our services; difficulty in integrating and deriving synergies from acquisitions; potential undiscovered liabilities of companies that Innodata Isogen acquires; changes in the Company's business or growth strategy; the emergence of the new or growing competitors; and various other competitive and technological factors and other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. Actual results could differ materially from the results referred to in these forward-looking statements. Along with these risks and uncertainties, there can be no assurance that the results referred to in these forward-looking statements will occur.

We encourage you to read the risk factors described in Innodata Isogen's various SEC filings, and an understanding of the factors that may affect the Company's businesses and results.

Now, I will turn the call over to Jack Abuhoff. Jack?

Thank you, Al. Good morning, everyone. Thanks for joining us today.

We are three quarters into this year and on plan to deliver record revenue growth in 2007. Today, Steve and Al are in New Jersey, and I am in Manila, the Philippines.

In our call today, I will review with you the highlights of our third-quarter performance. Then we will discuss the business, its direction, its improving dynamics, and areas of expanding opportunity. I will also discuss certain challenges we face and what we're doing about them. Then, Steve Ford will break out the numbers in more detail. When Steve concludes, we will take your questions and comments in our Q&A period.

Third-quarter 2007 revenues were approximately $18.1 million, up nearly 75% from third-quarter 2006 revenues of approximately $10.4 million and up 11% from second-quarter revenues of $16.3 million. The third quarter was our fifth straight quarter of sequential quarterly revenue growth. With only three quarters of the year in, we've already exceeded our 2006 revenues by $6.3 million.

On our last earnings call, we said to expect 65% year-over-year increase in revenues in the second half of 2007. We are now revising that guidance upward as a result of strong client demand and strong execution. We know anticipate in excess of 75% year-over-year revenue growth in the second half of 2007 with Q4 revenues exceeding Q3.

Moreover, we have some important new deals in late stages. If we're able to make good progress on these deals, as I think we can, we will be further sowing the seeds for a strong 2008. And depending upon timing, we may even see some additional Q4 contribution from these deals. Looking out to 2008, we anticipate continued strong performance.

One of the most attractive elements of our business model is the affect that revenue increases have on earnings. If you look at this quarter, year-over-year, you'll see that 58% of the additional revenue we added went straight to the bottom-line earnings. As we continue to drive revenue, we can expect that in excess of 40% can go direct to bottom-line earnings. So in Q3, we earned $2.115 million, which is $0.08 per diluted share. This is an increase of approximately 145% on Q2's $0.03 per share. At the end of the quarter, our cash and receivables stood at $23.4 million, up nicely from Q2's $21.7 million.

The growth we are showing is coming mostly from increasing our knowledge process outsourcing work. Expanding the knowledge process outsourcing work we performed was indeed the key element of our 2007 strategy. Knowledge process outsourcing, referred to as KPO for short, is a type of business process outsourcing but it involves higher end work. Business process outsourcing typically involves repetitive back-office tasks performed by low-skilled workers, but knowledge process outsourcing requires analysis and higher order-demand expertise. The people who perform this work often have postgraduate degrees and professional certifications, like lawyers, medical doctors, and engineers. Much of the KPO work we perform involves using professionals -- JVs, M.D.s and B.A.s, Ph.D.s and others -- to help edit, organize content, author content and to specialize information products that are sold by the world's leading publishers.

Here's a clear example of the type of work we do. Just this quarter, for a new client who is a leading business news aggregator, we helped launch a product that delivers customized summaries every day to corporate executives on topics of interest in industries such as healthcare, retail and media. We put in place a streamlined process of advanced tools so each of our people working on this product can monitor incoming news, select relevant stories, and write more than ten summaries each day, which are then posted directly to our clients' Web site.

We started out helping the client create content for 4 industry sectors, but now we are ramping up to cover more than 50 industry sectors. By using the right processes and tools and performing the work offshore, we're able to save the client almost 50% from what it otherwise would have cost them to get this work done.

From Q2 to Q3, our KPO revenues increased by 22%, a sizable increase. However, looking year-over-year, KPO revenues increased still more dramatically, rising 160% from approximately $2.9 million in Q3 last year to approximately $7.5 million in Q3 this year. We now have more than 1,500 full-time personnel providing KPO services.

There are a few reasons why KPO work is so attractive to us, more attractive, frankly, the systems integration or digitization. For one thing, the revenue per head is relatively higher, so we're able to generate comparatively more revenue with our existing investment and production facilities. The second reason is the work tends to be more ongoing. More than 60% of our KPO revenue is recurring revenue.

Now, as if those reasons weren't enough, the predictions industry analysts are making for KPO Market growth are simply staggering. Let me give you an example. Frost and Sullivan, a respected business research and consulting firm that tracks the outsourcing marketplace, expects KPO to grow by a compounded annual growth rate of 63%, going from $650 million in 2006 to $32.2 billion by 2014.

When it comes to KPO work, we have several significant advantages that our competitors lack. Some of these advantages serve to make us good; others of them make us great. What makes us good is mature processes and project management. We've been performing editorial high-end processes for a long time now, and we've figured out how to bring together onshore and offshore teams in an integrated delivery model.

What makes us great is that we just don't stop at labor-based savings. We use technology to its fullest to create additional, ongoing savings. Our engineering teams know how to automate tasks and create efficiencies to progressively and significantly reduce the human effort required. With their continuous improvement orientation, we are always improving margins on our ongoing work.

To ride the KPO wave that the analysts are predicting, we're going to build on what makes us good and what makes us great. We're going to build on our project management; we're going to build on our onshore/offshore model, and also on our differentiating engineering capabilities as we expand strategically to offer more and more KPO services.

Just this year, we launched two new service areas, Technical Writing Services and Research and Analysis Services. Our Research and Analysis initiative has already secured four new clients and has more in the pipeline. Our Technical Writing group is also making great strides. In our last earnings call, I mentioned that our Technical Writing group had won the long-term services engagement for a leading global technology manufacturer.

I want to bring you up-to-date on our progress on this, because I believe it is indicative of the dynamics of a successful KPO engagement. In the short time we've been working for this client, we've expanded from about 4 or 5 people to more than 30 people -- project managers, writers and editors who perform work form multiple locations across China, the Philippines and the United States. Now we're in the process of adding another 10 to 12 technical writers and editors to handle additional assignments that the client is giving us. The client has indicated that it would like to expand our relationship further still to incorporate additional product lines.

There are many other business and service areas that are ripe for us to expand into and that also build upon the strong foundation we have in process management, project management, and workflow engineering. Some of these are adjacent to or extensions of our current services, like other types of research services and other types of content design services. Others are slightly further afield. These include opportunities providing specialized legal work, market research, pharmacological research, and engineering and design, to name, again, just a few.

If you haven't yet read Thomas Friedman's best-selling work called "The World is Flat", I sincerely urge you to do so because what Friedman describes in his book, the redistribution of where and how work gets done, is exactly what we as Innodata Isogen stakeholders are participating in. Friedman's thesis in a nutshell is that, thanks to instantaneous global communication, we're in the midst of a world revolution that is on par with the development of the printing press and the discovery of the New World. In a world made flat by Internet communication, we can create workflows that incorporate skilled professionals in multiple locations across the globe to create specialized products, and that is exactly what we're doing.

Given the size of the KPO market opportunity, our capabilities and our differentiated position within the category, my management team and I are confident that we will achieve annual revenues of $100 million within the next few years. Clearly, the significant revenue gains we are achieving this year have brought that important milestone substantially within view.

Another key element of our 2007 strategy has been to make the Company better at winning new business, both from existing and from new clients. One of the ways that we sought to make that happen this year was by creating self-contained market-facing business practices that have everything it takes -- sales, engineering, project management, business management -- to work with clients consultatively and creatively. In the first three quarters of the year, this resulted in more than 15 new client wins and more than 100 expanded engagements from existing clients. Our teams are winning business because they are hungry to succeed and they are delivering unsurpassed value to clients.

Let me share with you a third-quarter win which we can credit to this new strategy. Our commercial practice was awarded a contract valued at several hundred thousand dollars by what I believe is the world's leading software company and a new client for us. The work was heavily contested, and we beat out some of the top tier systems integrators. The work will be to engineer and build the Web content management system for them that they will use to drive their online health system. Right now, we're under an NDA that prevents me from naming the company, but I can still read to you what they said about us in their e-mail informing us that we had won the business. They wrote, and I'm quoting now, "This was not an easy decision to make. The competition was experienced and motivated, but you consistently offered the best response to each of our requirements. You're structured and thoughtful approach to the project made a huge difference to our decision. Our team deeply respects and appreciates the professionalism that you displayed throughout this process, your timely response to all of our questions, and your flexibility during the negotiation process, as well as your management's commitment and enthusiasm to provide a superior solution." Now, that's good feedback indeed, and it's the type of feedback that is now driving our success.

We recognize that, as we grow, we're going to need to be supplementing our team with additional top talent. This quarter, we brought in a gentleman by the name of Tim West, who will support our efforts within the intelligence, defense and security agencies. Tim has got a tremendous resume and following. He joins us from the Defense Intelligence Agency, or DIA, where he led the Agency's efforts to establish Best Practices and standards for data and service-oriented architecture. Prior to that, he led the DIA's intelligence community, Metadata Working Group, where he was responsible for establishing standards on the use of XML and Metadata within the national security community, which includes intelligence agencies, the Department of Defense, and the Department of Homeland Security.

We also added key senior talent to our KPO execution team, adding professionals that enhance our domain expertise. This included a classmate of mine from the Harvard Law School who was most recently a professor at the University of Toledo College of Law. It also included a medical doctor who is most recently an assistant professor at the University of Maryland School of Medicine and holds degrees from the Johns Hopkins Bloomberg School of Public Health, Temple University School of Medicine, and Yale University.

Amid all this good news is the challenge we face from a weakening of the U.S. dollar against the Philippine peso in the Indian rupee. The depreciation of the dollar is a head-win to our margins in general and erodes the labor cost arbitrage play that is a component of our value proposition. We have, however, taken active steps, both tactically and strategically, to deal with this. For example, on the tactical side, we are able to put in place hedging strategies that help mitigate, for a period of time, the effect of dollar depreciation. In addition, we're focusing our engineering talent on greater automation to achieve productivity offsets. Remember, this is the same engineering team picked this quarter by the world spitting software company to help it create efficiencies in its content management system. So, we're talking about some top talent here.

Strategically, by focusing on KPO work, we're driving higher margins and greater asset utilization. So the currency issue, while the drag on margins, is offset by these gains and by the operating leverage we enjoy as we continue to drive revenue on a fixed-cost base. Between these tactical steps and our strategy, we are positioned well to mitigate the negative impact of the peso and rupee appreciation in the near and medium term.

I want to thank you for your time. I will be joining you again during the Q&A portion of our call, but first, Steven Ford will walk you through the numbers in greater detail. Steve?

Thank you very much, Jack. Good morning and thank you all for joining us.

Now, let's take a closer look at the numbers. I will take you through the changes in revenue, provide insight on the cost structure, including discussing the impact on our operations of the falling U.S. dollar, explain our cash generated from operations, and then conclude with some general comments.

Revenues in the third quarter were up 11% from $16.3 million in Q2 to $18.1 million this quarter. On a year-over-year basis, revenues improved 74% from $10.4 million in Q3 2006.

We customarily separate our revenue into recurring and non-recurring categories. Recurring revenue, which represents 62% of total revenues, consists of services that we anticipate a client will require for an indefinite period. Non-recurring revenue, which is the remaining 38%, refers to projects that have a more specific timeframe for completion.

Another important measure of revenue is the growth in knowledge process outsourcing, or KPO. KPO activities drove approximately 76% of the growth in the third quarter of 2007, as compared to Q2 of this year and 60% of the 2007 third-quarter year-over-year growth of $7.7 million.

In looking at revenue from a segment standpoint, our content services business generated $17.4 million in Q3 2007, up $2 million from $15.4 million in Q2 2007. This increase principally reflects revenue from winnings announced earlier this year.

Professional Services revenue declined 19% from $967,000 in Q2 2007 to $784,000 in Q3 2007. This decrease is a result of projects completed in the third quarter. As the Professional Services group completed projects, we refocused the teams on supporting new KPO and content services revenue initiatives. We are continuing to examine ways to use our Professional Services group in growing new business offerings and in further penetrating our existing client base.

Direct operating costs were $12.5 million or 69% of revenue in the third quarter of this year, compared to $8.8 million or 85% of revenue in the third quarter of last year. This improvement in direct operating cost, as a percent of revenue, to 69% from 85% was achieved in spite of the impact of a weaker U.S. dollar versus the currencies of the Philippines and India. As you know, we perform most of our production in the Philippines and in India, where the majority of our employees and facilities are located. We fund these operations by sending U.S. dollars to these countries. We benefit from labor rate arbitrage, the use of local engineering production improvements, and the application of technology to our processes.

In periods of a strengthening U.S. dollar, our requirements to send dollars is lower and our offshore unit costs decline. Of course, the opposite occurs when the dollar weakens.

During the third quarter of this year, we put a plan in place to mitigate the effects of the weaker U.S. dollar on our operations. We're currently using forward contracts to reduce the impact of the falling dollar on our production expenses. Implementing these hedging strategies enables us to mitigate some of the effects of currency fluctuations on our cost structure. We will continue to examine all means available to us to protect our margins.

Even though we have these operating cost challenges, we saw our gross margin grow from 15% in the third quarter of 2006 to 27% in the second quarter of 2007 and now to 31% in the third quarter of 2007. As we have continued to grow our revenue base in the third quarter of this year, we have demonstrated the positive effects of the operating leverage inherent in our business model by the achievement of higher gross margin in spite of currency challenges.

Selling and administrative costs of $3.5 million in the third quarter of 2007 (inaudible) the same total dollar amount as the second quarter of 2007. As a percent of revenue, selling and administrative expenses declined to 20% of Q3 2007 revenue from 22% of Q2 2000 revenue and significantly from the 32% of Q3 2006 revenue.

On a pretax basis, we earned $2.3 million in Q3 2007, compared to pretax earnings of $953,000 last year and compared to a pretax loss of $2.2 million in Q3 2006. Our third-quarter 2007 results included a $167,000 provision for income taxes, primarily representing income taxes attributable to certain foreign operations.

With regards to taxes, the Company has established a cumulative valuation allowance of approximately $4.3 million, which is roughly equivalent to 34% of our net operating loss carry Ford or NOL. Once we achieve several profitable quarters for U.S. tax purposes and satisfy other criteria, we may be in a position to begin recognizing the NOL as a tax benefit.

After taxes, we earned $2.1 million or $0.08 per diluted share in Q3 2007, compared to a net earnings of $862,000 or $0.03 per diluted share in Q2, 2007 and compared to a net loss of $2.2 million or $0.09 per diluted share in Q3 2006.

Next, I will discuss our operating leverage. As I mentioned in prior conference calls, in planning for 2007, we made the conscious decision to hold onto our production capacity in Asia and to retain our essential management infrastructure. By retaining this capacity and talent, we are able to leverage our established fixed cost base and primarily incur only variable costs as we ramp up the business. As a result, while we felt the effects on the downside last year, we have now experienced high margins on our incremental revenues in 2007. For example, in the third quarter this year, we generated a $2.3 million pretax profit, compared to a $2.2 million loss in the third quarter of last year. This $4.5 million improvement, which represented an (inaudible) margin of 58%, was achieved on $7.7 million of additional revenue. These higher margins in the third quarter of 2007 were the result of favorable product mix and stringent cost control in spite of significant weakness, which I've just mentioned, of the U.S. dollar versus the Philippine and Indian currencies.

During the third quarter, we generated $2.6 million in cash from operations. The positive $2.6 million is calculated by adding the $2.1 million in net profit plus $800,000 in depreciation and amortization, and subtracting $300,000 of net changes to other assets and liabilities. Our free cash flow during the quarter is $900,000, which is the result of subtracting $1.7 million of capital spending from the $2.6 million in cash from operations. We ended the third quarter with $12.1 million in cash, which is a $900,000 increase from the ending cash balance at June 30, 2007.

At September 30, 2007, we still maintained our $5 million line of credit, and we have no outstanding obligations under this credit line.

In relation to general corporate matters, I'd like to comment on our strategy regarding M&A activity. We've mentioned, during prior conference calls, that, during 2007, we were going to focus on organically growing the top line and driving the business back to profitability. The results so far this year are a good indication of our progress. Given the solid traction we've achieved this year, I will be turning my attention more in the direction of M&A opportunities in 2008. We will be looking at deals that will help us grow the top line, have U.S.-based operations that we can take offshore, and earn a revenue size range generally from $5 million to $25 million, well priced and are accretive to earnings per share. I will provide you with more color regarding M&A activities in the future as the situation develops.

Okay, that wraps things up for now. Again, thank you, everyone, and looking forward to your questions.

Greg, we are now ready for Q&A.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Bill Sutherland, Boenning & Scattergood.

Thanks, good morning. Jack, you mentioned, in the KPO space, I think you talked about a potential run rate north of $100 million. First of all, did I hear you correctly? Then perhaps you can just address a little bit more specifically the timeframe you're thinking of.

Thanks for the question. I did mention that we are targeting to get to $100 million. We think that the opportunity and the potential is there, and we think we're making some good headway toward that direction.

What we've said is that, in the next few years -- we haven't put a timeframe on that at this point, but we're going to run as hard and as fast as we can to get to that goal.

But does that -- I just want to make sure I'm clear. Does that include -- does that essentially refer to all content management, in other words the $17 million in Q3? Is that what you mean by KPO or --?

Well, in terms of the $100 million, I'm talking about the overall [business].

Okay, okay. Do you all talk about offshore utilization and also turnover?

We do internally. We have not been -- we've not been sharing metrics regarding utilization or turnover. The metrics in our business are a little bit more complicated than they are in some others because we have a mix of different types of facilities and facilities that use seats in different numbers of shift. What we find is that, depending on the mix of revenue that we're bringing in, we are incrementally adding to our workstation base as we move forward.

[Tim Clarkson], Van Clemens.

Great quarter, guys. In particular, accolades to hedging; that's quite skillful.

What I wanted to ask about was could you just discuss this KPO in the context of the historical strengths of the company, your experience with XML, and also your offshore labor facilities that can do things more cheaply?

Sure. We've got a long history providing high-end, the main specific services. What we are finding now is the opportunity has emerged to provide that at a much greater scale. Critically, what we are able to do is leverage on the things that we've put in place. So as a company, we are very strong in terms of process management. We know how to construct processes that are very efficient.

We're very strong in terms of project management. We've got great capabilities in terms of global resourcing of people. Then of course, we've got a highly differentiated capability in terms of engineering. You know, I think we're the only company I'm aware of in our competitor set that is selling engine services directly to customers to help them reengineer their own processes. So when we turn those capabilities inwardly, as we increasingly have, we've got a very compelling offering. It goes beyond labor arbitrage, and it goes to the heart of what we're looking to accomplish for customers, which is making them efficient and more productive and helping them save money.

Okay, let me just see if I got this right. So, to put it more simply, I mean I assume that there's a lot of companies that try to do BP: and they screw it up for various reasons; they underestimate the difficulty of going offshore. So in other words, what you do is you are kind of an experienced guide that will allow them to go offshore and experience the cost savings without screwing up.

That's right. In other words, the critical -- you know, the threshold requirement is you've got to be able to execute well. Executing well requires great processes and mature methodologies. We've got those in place and that's what makes us very good at what we do. What we are able to do is go beyond that and deploy our technology and engineering skills to get savings beyond just the savings that labor arbitrage brings.

Tonight -- and I think I mentioned at the beginning of the call that I'm in Manila this evening; I'm here with some customers who came to understand how we do certain work. They were very impressed by the way we've taken labor out of the workflows, by virtue of the technologies we've created.

(OPERATOR INSTRUCTIONS). Tim Reynolds, Goldman Sachs.

Congratulations on you quarter.

A couple of things -- I'm looking at basically where you guys are at right now. I think, looking at the Company itself, you guys are pretty much undervalued here. The number $100 million, looking at the way you guys are growing, is it possible that you can give a little bit more of a number for next year's bottom line?

Yes, I think, at this point, we're going to -- you know, we are comfortable talking about obviously the rest of this year, and we're comfortable saying that performance is going to be very solid next year in terms of revenue growth and in terms of earnings. I think we are going to need a little bit more time to be able to quantify that further because, as I said, we've got a number of very significant deals in somewhat late stages and some more behind that. So as we see how those shape up, I think we will be in a better position to provide a little bit more color to what the range of possibilities is for 2008.

Okay. I guess I just want to congratulate you on a good quarter, and I do think you guys are pretty much undervalued. I think a lot of more companies are going to start looking at you guys now. Congratulations.

Well, that's great to hear. Thank you. I think, you know, one of the things that Steve and Al and I have on our calendar, working with Stan Berger is to increase the IR efforts fairly substantially in the next, starting the next several weeks. Actually, we've started already.

Great.

(OPERATOR INSTRUCTIONS). [Sudhir Cona], [Cona] Finance.

Yes, great quarter. I have a question on the percentage of revenues coming from KPO. Could you -- I mean, the $17 million -- what percentage growth is that just if you take the KPO part?

You know, if you look at our revenue and you look at the revenue base, we grew, year-over-year, $7.7 million. About 60% of that represents KPO.

Okay, and most of KPO is recurring revenue?

KPO, by its nature, tends to be more towards recurring; that is correct.

[Perry Highland], Van Clemens.

Great quarter, no question about it. Can you just give us any idea if you're making any inroads with the government contracts or projects or bidding or whatever?

Sure. You know, there's a lot of good work there for us to do. We mentioned, I think, an important hire that we brought onto the team this quarter. He is integrated well into the work that we're doing and sees lots more possibility where that came from. We've expanded the work that we're doing there. I believe there's more in a late-stage pipeline that we're looking at in terms of further expansion. As you know, what we're doing there is essentially building information management systems that help intelligence analysts relate and find information quickly. It's an important -- it's an important requirement that we've got right now as a country, providing that type of knowledge-based decision support, so lots of opportunity there, lots of opportunity in terms of the publishing sector also, taking some of those semantic technologies that we're applying and bringing those to the information media companies that are our bread-and-butter business. They are helping customers relate and find information, just like the analysts have to relate and find information. So it's kind of a double-play. We've got a lot of opportunities to drive that growth into the sector, and then we've got additional opportunity to take the things we are doing there and bring them to the core customer base in information media.

One last question -- so you're still bidding on like projects then, rather -- I mean the ongoing KPO (inaudible) is there still project-based business you bid on?

Absolutely, absolutely. I think there's going to always be a project, a portion of the business that's project-based. You know. in terms of how that affects the revenue base, you know, we're not going to manage -- we're not going to overly manage that when we can take large-scale projects that are lucrative, that enable us to make money; we're going to do it. We will hope to even out the project flow in terms of having a larger number of projects going on and of course by focusing primarily on the KPO space.

Bill Sutherland, Boenning & Scattergood.

Things very much. Jack, actually where I was headed with my question on utilization was you've been able to, since you kept the capacity in place, to manage this really nice uptick in demand. I'm just curious, if it were to continue at a very rapid pace, to what degree there might there be a limitation as far as the professional, the availability of the talent offshore.

Bill, thank you for coming back with that, because I realize you had a two-part question and I didn't get to the second part.

What we're finding is there is not a lack of talent that we can tap into. The biggest problems, relative to attrition, frankly, are among two labor pools -- IT labor, particularly certain types of IT skills, and then separately the types of people with skill sets that would have them working in call centers. For the most part, we're not actively competing at a large-scale for that type of labor.

Okay, and so even though they are higher-level degree candidates, they are readily available in the Philippines as well as India?

That's correct.

Okay, that's great. Then Jack -- I'm sorry, Steve, on the hedge, how far out did you go with that and kind of what portion of your cost did you cover with it?

The way that works is that we generally try to evaluate this, at least initially, on a quarter-by-quarter basis with a look out over the six to nine-month horizon. So we are still refining our approach to this area. Certainly, the whole idea here is to try to lock in a more favorable cost when we feel it's appropriate to do that type of hedge. So you know, that's really what we are looking at here, and we're going to continue to look into 2008. So we've started the middle of this year looking through the end of this year. We're now looking at 2008 right now. But we are covered through the end of this year at this point.

James [Sunigular], Global Capital.

Great numbers. I know you commented that you couldn't possibly comment on the earnings estimate, but is it possible you can just give us some kind of a guideline from the business that you have now (inaudible) any possible acquisition going forward to next year?

Could you just repeat the last part of that sentence? Outlook in terms of --?

Would involve (inaudible) guidelines with the current business going forward to first quarter, second quarter of 2008 without any possible acquisitions going forward into 2008.

So some additional color in terms of what we would look for in an acquisition, or timing of acquisition?

Right, what you would look for in the acquisition and what kind of numbers on the bottom line would that bring into the bottom line?

I see, okay. I guess, in terms of timing, as Steve mentioned, we have increased our focus on acquisitions. We've actively got a list of companies that we're interested in, and we're progressively making contact with those companies. We've got our targets set on companies that have certain differentiating KPO capabilities, which we believe could fit well in terms of a portfolio, with the KPO capabilities we've got now.

I think, in terms of timing, I wouldn't expect anything in the first quarter, certainly. I think it would be later in the year.

Jane Levy, Seal Capital.

Just a couple of questions -- first, a housekeeping question. You said content services was $17.5 million in Q3, up from what year-over-year in September '06? Did you say it was up $2 million or up --?

It was up $2 million, Jane, from the prior quarter. So the prior quarter, the $2 million number, it was $17.4 compared to $15.4 Q3 of this year compared to Q2 of this year. That's the $2 million you are referring to.

Yes, yes, I got it. Then, it just wanted to check. You know, 31% gross margin is really excellent, seeing that you have this pressure from currency. I just wanted to get a sense. You know, I'm trying to define in my own mind how much of that improvement came from the increasing proportion of KPO revenue. Is there any frame that you can give us perhaps for the margin profile of KPO relative to the rest of the business?

The KPO business, Jane, carries very high margin with it, and it's a very lucrative business for us to be in. So we haven't really come out and differentiated the margin. The best way for you to try to get a better sense of that is to take a look at the growth and the percentage that we've indicated represents KPO. The reason I say that is because we have a variety of KPO services. We have KPO services that involve various professions, both in the medical field, in the legal field and in others. They carry a variety of margins, but the blended margin, the overall margin is significantly more favorable. So as we've indicated, our growth is primarily KPO, and obviously the move up in margins as you can see, is primarily associated with that.

Okay, great. Are we still in line for $2 million to $3 million in CapEx in the second half? I guess you did about $1.7 million in Q3.

Yes, I think the $2 million to $3 million for the second half, you know, is not a bad number to use as an estimate. Our number in Q3 was $1.7 million. I would expect we would do a number maybe in the $1 million to $2 million range in Q4. We are generally looking at, over a 12-month horizon, of a $3 million to $4 million range in total. It varies; some quarters will be higher or lower than others. It's tied into our need to provide more technology for our production and our production and technology needs to be put in place obviously immediately in advance of us generating revenue. So there is a sort of a natural ebb and flow to that investment in CapEx. But generally speaking, over a 12-month horizon, right now, we are looking at $3 million to $4 million as a reasonable range.

Okay. Then my final question -- last quarter, you did talk about revenue concentration from your biggest clients. Is there a number that you care to share with us this quarter?

Our revenue concentration has increased. I don't have the percentages here right now, but it has increased slightly since the last quarter numbers that we put out. We will actually be putting that information in our 10-Q, which we will be filing shortly.

Okay, and it's the same clients as last quarter?

Yes.

Okay, great. Thanks.

That concludes the question-and-answer session today. At this time, I'd like to turn the conference back over to Mr. Abuhoff for any additional or closing remarks.

Well, thank you, everybody. Thanks for your questions and thanks for joining us today.

I guess I will just summarize our discussion today. We're growing our business. We are delivering strong financial performance. In Q3, we increased revenue year-over-year by nearly 75%, boosted recurring revenue by more than 60%, and more than doubled profitability from Q2 to Q3.

We anticipate that we will see strong revenue performance and sustained profitability in the fourth quarter. Further, we are anticipating that revenues in Q4 will rise more than 75% from Q4 2006 and will be up strongly from Q3 2007. So that is up strongly from the quarter that we are reporting on now as well. Again, we are confident that we will sustain strong financial performance and profitability in 2008. Our balance sheet shows cash increased by about $1 million in Q3 to more than $12.1 million on the same time receivables rose from $10.5 million to $11.3 million. We are engaged in an acquisition strategy. We're looking for select deals, good deals that are accretive to earnings. I'm working with Steve and Al and Stan Berger to intensify our investor relations efforts and get out and tell our increasingly compelling story to a broader pool of interested investors. We are also working on several significant opportunities which we believe could help fuel further our rapid growth.

So I guess today, as always, I want to thank you for your confidence and for your continued support. I very much appreciate it, very much appreciate the large number of new callers on with us today. Perhaps, if anybody is interested in getting together after the call for a more in-depth meeting, we'd love to do that. So thank you, and look forward to being with you next time.

Once again, that does conclude today's conference call. We thank you for your participation. You may now disconnect.