Innodata Inc (INOD) 2007 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter and year end 2007 earnings release conference call. Today's conference is being recorded. At this time I would like to turn the conference over to the Vice President of Marketing, Mr. Al Girardi. Please go ahead, Sir.

Good morning. Thank you all for joining us on our fourth 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 conference 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 and 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, difficulties in integrating and deriving synergies from acquisitions; potential undiscovered liabilities of companies that Innodata Isogen acquires, changes in the Company's business or growth strategies, the emergence of 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 SEC.

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 for an understanding of the factors that may affect the Company's businesses and results.

Now I'll turn the call over to Jack Abuhoff. Jack.

Thanks, Al.

Good morning, everyone, and thanks for joining us today. My team and I are pleased with the operating results that we are reporting today.

First we exceeded our guidance for the quarter and our chief financial records for the quarter and for the year. Equally important, we are reporting a strong outlook for 2008 and our expectation that 2008 will also be a growth year for us.

Our results reflect execution of key strategic initiatives that we laid out for you at the beginning of the year including building a more energized and effective new business development team, and focusing on the emerging knowledge process outsourcing market.

We will start with a brief overview of fourth quarter and year end results. Then we will discuss the business, its dynamics and direction and what we see as our opportunities and challenges; and we will address also what we see for the year ahead. 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.

Fourth quarter 2007 revenue rose to $20.5 million which was almost double revenue of $10.5 million from the same period last year. More importantly, looking at performance for the year overall, revenues increased 65% from 2006 to 2007 climbing from approximately $41 million to approximately $68 million. At the same time, we continued to demonstrate significant operating leverage. We grew revenue by 65% but with only a 7% increase in SG&A spend, and saw 44% of incremental revenue go straight to the bottom line.

Now comparing fiscal year 2007 net income to fiscal year 2006 net income, the swing there was nearly $12 million. We earned approximately $2.2 million or $0.09 in Q4 and approximately $4.5 million or $0.18 in 2007 overall. We generated about $6 million in cash from operations last year. At the same time we saw balances of cash and equivalents rise again up to almost $15 million by December 31 with another $11 million in solid accounts receivable.

Looking ahead to 2008 we anticipate continuing improvement in recurring revenues, driven by new KPO engagements and expansions to existing programs. We expect first quarter revenues to be approximately $18 million or up more than 40% year-over-year as we complete several 2007 projects and begin ramp up on several new 2008 programs. And we believe that we are seeing a sufficiently broad and robust set of opportunities that we can anticipate double-digit growth in annual revenues in 2008.

By the end of this year, I would like to see us having moved progressively toward our stated goal of $100 million in revenue.

Looking forward we have an aggressive strategy for growth. The central thrust of our strategy will be to further leverage our industry and professional expertise, our experienced relationships and reputation we have, and the infrastructure we put in place in the area of outsourced content services. These assets that we have got in place surpassed nearly all competitors in the media, publishing and information services sector and these are our platform for future growth.

First, we have an opportunity to continue to grow with our existing clients and to add new logos to our roster of success through ongoing improvements in sales and marketing execution.

Second, we can expand the service offerings we provide to our core media and information services clients, emphasizing our KPO services.

Third, we will continue to plant seeds and select KPO segments that are outside the media and information sector. We have already begun this and have had early successes in areas such as technical writing. We will select areas for investment that we think have the highest probability of reaching critical mass in a relatively short period of time. There are a multitude of knowledge-based offerings that leverage our capabilities and our competitive assets.

This strategy will allow us to grow the business efficiently, to invest and reinvest capital in our productive capacity and by doing so enhance and accelerate our growth.

Now our confidence in business is driven by a number of factors, some external and macroeconomic in nature, others linked to the strategic and operational improvements we have worked so hard to accomplish internally. For example, we have made steady gains in the development and management of our sales force. We have adopted a team-based business development approach that is driving results and reinforcing results-based culture. We have put in place repeatable sales processes that maintain our focus sharply on client satisfaction and helping businesses accomplish their goals. We've improved our focus on attracting skilled talent, supporting them in the field, measuring and managing the fundamentals of their activities, rewarding success and also, of course, transitioning individuals that might be more successful elsewhere.

The results so far are encouraging. In 2007 -- this is important -- 2007 we added 33 new organizations to our client roster. Some of these new companies you are no doubt familiar with. Random House, [Penten] Media, the British Library, A&C Black, Alcatel-Lucent and Microsoft, for example. This kind of continuing expansion in our client base is indeed significant and significant for several reasons.

The first is that our client relationships frequently attain greater scope and scale as new clients experience success with us. What's more, because our services extend across a chain of interrelated business processes, we often have ample opportunities to cross sell, to upsell and otherwise consolidate business. So once we engage with a new client we are typically able to expand our services within, in scope and scale and to provide additional adjacent services.

An example. Last December we announced that we had expanded our outsourcing relationship with [Switz], the world's leading subscription services company. At first Switz had hired us to provide very basic conversion service to them. But they have recently now engaged us to help them on a much broader level, fulfill their subscription requests where we locate copies of journals and hard to find articles, using libraries and such. This is a fairly complex process that requires our people to have expertise in a range of topics and domains and to follow up and respond directly to customer queries.

So when you take this ability to expand our customer relationships this way and then factor that by our high customer retention rate, what you realize is that our client relationships often represent considerable and sustainable lifetime value. Over the past three years, we have maintained retention rates above 90%. Specifically, 94% in 2005, 93% in 2006, 95% in 2007. So in other words, in the last three years an average of 94% of our new clients that we bring in become recurring clients.

So the upshot of this is that the lifetime value of new clients is considerable and the opportunity to monetize our new-found ability to bring in clients at this level -- remember we've brought in a record 33 new clients this year -- this opportunity is considerable. Also to this point over the past three years our revenue from what were -- excuse me, in 2007, our top [four] client relationships has just about doubled from 22 million to 42 million. We've accomplish this by expanding relationships within the companies, by launching new projects with new divisions and essentially earning the status of a trusted partner and a key player in these companies' product development and maintenance strategies.

Now in order to continue to foster close client relationships which again is the key here, we seek to work with our clients as consultatively as possible. This quarter I'm pleased to say that we further expanded the number of strategic consulting engagements where our consultants are retained by our clients for strategic consulting, helping them develop technology roadmaps, drive process or business process rationalization, consolidate activities and, of course, identify [ad] sourcing opportunities.

While we've traditionally done a good job with technology consulting where we help companies choose a tool or a technology that drives operational efficiency, for example, frankly we historically struggled with strategic consulting. But in 2007, we are very happy to say we turned this around and have created the beginnings of a track record of successes in this area. Our strategic consulting team is working with several large enterprises now at a strategic level and we have some significant opportunities at late stages that represent important expansions of this work and we are seeing KPO implementation work come from these efforts.

It is also important to recognize that, from a historical perspective, we are no doubt in the right place at the right time. Increasing numbers of companies here in North America as well as in Europe and elsewhere are embracing outsourcing, and not only are large numbers of companies looking to source skills globally, but the type and the extent of the work is growing. It is growing in scope. It is growing in complexity and also in value.

This is very much evident in our business as we have expanded beyond production-oriented services such as data conversion, composition and to much more challenging knowledge process outsourcing activities. Our offshore staff which several years ago was comprised almost entirely by entry-level hires is increasingly represented by people with postgraduate degrees and professional certifications like lawyers and medical doctors and engineers.

We use this globally distributed work force consisting of JDs, MDs, MBAs PhDs and others to help author, edit and organize content into the specialized information products that are sold by the world's leading publishers and media companies. For example this quarter we are helping a leading STM publisher offer a new product in online subscription-based reference service to physicians in medical colleges and at the core of the offering our medical diagnostics from more than 50,000 medical images. The physicians and radiologists on our staff examine the images and they create summary diagnostic aids and cross-references to help doctors who subscribe to this service finetune their patient diagnosis.

So KPO. KPO remains our most significant growth area and our most significant growth opportunity. To maintain our momentum here, we will continue to promote our KPO capabilities and drive the changes necessary to make our Company an even more aggressive competitor and even more valuable partner to our clients.

In part that means developing new services such as the technical writing and research and analysis services we launched this year. Subject to research analysis this past quarter, we began to get two new research analysis engagements which together should add about $500,000 of recurring revenue to our recurring revenue base. In the first engagement our researchers search for and analyze corporate Web sites, SEC filings, journal articles and other sources to create analysis reports. In the second, our teams of allied health care professionals provide literature search and retrievable and content creation services.

That first engagement is on the heels of three others with the same new client. The second engagement is with the new division of an existing client and it is ripe with expansion opportunity.

Now, as we discussed in our last call the weakening of the U.S. dollar against the Philippine peso and the Indian rupee is a headwind to our margins in general, and of course, erodes a labor cost arbitrage play which 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 effective dollar depreciation. Steve will talk more about this in a few minutes. But perhaps even more importantly, we are focusing our considerable engineering talent, the same talent that is helping the world's leading software company engineer a new content system to focus on greater automation to achieve productivity offsets.

Now because we typically bill our clients based on units of content produced, we can drive improved margins by engineering better technology and better processes. This is an advantage that many BPO companies such as call center companies lack because they build clients based on headcount deployed. The combined greater margins and asset utilization from higher revenue per headwork combined with our operating leverage means that we have tools at our disposal to mitigate the perceived impact of the currency issue.

We are also better positioned than a lot of BPO companies to perform well during periods of economic slowdown. Again for call center companies as consumer spending declines, people buy fewer goods and services; and call volumes to call centers decline. However, we expect the slowing economy to lead to an increased demand for our services as our clients and prospective clients have a greater need an urgency to reduce both operational costs as well as new product development costs.

As our clients and prospects realize that they can reduce operating costs by reassessing the need to have in-house staff build and maintain information products and perform analytical services, we are positioned to grow. Similarly, as our clients and prospects realize that they can more effectively drive their topline growth by lowering their costs of new product development, we are again positioned to grow.

So in these ways we believe our business enjoys some strong countercyclical elements, and that our business is strategically well-positioned to perform positively regardless of the market environment. And our increased ability to win new client programs we anticipate will, over time, result in a broader, more diversified revenue base, enhancing our ability to weather customer or product downturns in smooth quarter to quarter volume volatility.

When we look at all these factors together, given our growth prospects, we believe this is the right time to invest additional resources in our business. We will be looking at opportunities to do just that. For example we will be looking to increasingly align sales, engineering and delivery around products and services which in turn will enable us to invest in people and infrastructure ahead of demand. We will also be looking to invest more significantly in developing technologies and approaches that constitute value add and set us apart from our competitors. Technologies that improve consistency and improve quality while reducing cost.

We will look to increase the level of touch points that we have with our clients. This will involve expanding our on-site presents with clients, program that we started in 2007 and from which we've seen significant successes. And of course we'll be looking at ways of increasing further our sales and marketing effectiveness and driving toward big win client engagements.

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

Thanks, Jack. Good morning and thank you for joining us. Now let's take a closer look at the numbers.

I will go through the changes in revenue, give you my insight on the cost structure including discussing the impact on operations of the falling U.S. dollar; explain the changes in SG&A; comment on our cash generated from operations; review the balance sheet and then conclude with some general remarks.

Revenues of $20.5 million in the fourth quarter of 2007 were up by $10.5 million or 95% from the fourth quarter of last year and were up 13% from the $18.1 million in revenue last quarter. On a year-over-year basis, revenues in 2007 improved 65% to $67.7 million from $41 million in 2006. In examining this year-over-year increase of $26.8 million, the majority is from an increase in prime use from recurring projects.

As you know, we customarily separate our revenue into recurring and non-recurring categories. Recurring revenue consist of services that we anticipate a client will require for an indefinite period. Non-recurring revenue refers to projects that have a more specific time frame for completion. The main driver of our revenue increase, both for the fourth quarter and for the full year of 2007, was our Knowledge Process Outsourcing or KPO services, the majority of which are recurring.

KPO services target processes that demand advanced analysis, interpretation and judgment. KPO activities drove the majority of the year-over-year revenue growth of $26.8 million and the majority of the quarterly year over year and quarterly sequential growth in 2007.

Next I will turn my attention to the area of direct cost and SG&A expenses. As a result of the $26.8 million increase in revenue, direct operating costs rose from $34.1 million to $48.6 million. While at the same time decreasing as a percentage of revenues to 72% in 2007 from 83% in 2006.

In comparing Q4 of 2007 to Q4 of 2006, direct operating costs have increased by $5.7 million or 68% but, as a percentage of revenue, have declined to 69% in Q4 of 2007 as compared to 80% in Q4 of 2006. In comparing the sequential quarters of 2007, you'll notice that direct operating costs in Q4 increased by $1.5 million compared to Q3 while sustaining 69% of revenue in each quarter.

The improvement in direct operating costs as a percent of revenue to 72% in 2007 as compared to 83% in 2006 was achieved in spite of the impact from 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, with a large majority of our employee base 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 2007, due to a weakening U.S. dollar, our requirement to send dollars went up significantly thus increasing our offshore unit cost. For example if both the Philippine peso and the Indian rupee had remained at the same exchange rate to the U.S. dollar throughout 2007 as they each started the year at, we would have experienced higher gross margins than what we have reported.

Our strategy in 2007 to mitigate the impact of the falling dollar on our production expenses included hedging our exposure by entering into forward contracts. Implementing these hedging strategies enabled us to mitigate some of the effects of currency fluctuations on our cost structure. That strategy - combined with the continuous implementation of production efficiencies, improvements in our technology and a more favorable revenue mix of higher margin KPO services - enabled us to overcome the impact of currency and consistently generate higher margins throughout 2007. We will continue to examine all means available to us including forward contracts to protect our margins in 2008.

Therefore, despite the impact of our operating cost challenges, we saw our full year gross margin grow to 28% of revenue in 2007 from 17% of revenue in 2006. In analyzing this increase in margin percent, it's helpful to examine the operating leverage which we derive by dividing the incremental gross margin by the incremental revenue.

In 2007, we achieved a total gross margin of $19.1 million which included $12.3 million of incremental margin on $26.8 million in additional revenue for an incremental margin of 46%. Even more significant is that we have been able to see most of that gross margin operating leverage benefit flow all the way down to the bottom line. In order to understand how we are able, we were able to achieve this, we will now examine our selling and administrative expenses for SG&A.

In 2007, SG&A costs were $15.3 million, which was a $1 million or 7% increase from the $14.3 million in 2006 but as a percentage of revenue declined to 23% in 2007 from 35% in 2006. The $1 million SG&A increase occurred in the fourth quarter where we experienced higher auditing costs related to being a first-time filer in 2007 under Sarbanes Oxley or SOx as well as significant marketing initiatives and an increase to our bonus accrual.

The auditing expenses are typically higher in both the fourth and first quarters of the year; and marketing expenses are generally greater in the fourth quarter. Even taking these Q4 SG&A increases into account, we were able to achieve close to a $12 million bottom line improvement in 2007 over 2006, as we went to a pretax profit of $4.5 million from a pretax loss in 2006 of $7.4 million. This approximate $12 million improvement was 44% of the revenue increase of $26.8 million.

We believe that once we cover ordinary annual cost increases, such as basic pay raises, typical audit and regulatory expenses and normal increases in other operating costs, we will be able to achieve meaningful operating leverage to the bottom line over broad periods of time. Therefore, as we increase revenues, we have the opportunity to create cash flow that we can reinvest in the business, either by building capability organically or through acquisition.

In completing our look at the income statement, on a quarterly pretax basis, we earned $1.9 million in Q4, 2007 compared to pretax earnings of $2.3 million in Q3 and compared to a pretax loss of $1.1 million in Q4 2006.

Fourth quarter 2007 results included a benefit from income taxes of $330,000, primarily representing an income tax refund attributable to certain foreign operations. In regards to taxes the Company has established a cumulative valuation allowance of approximately $4.6 million, due to net operating loss carryforwards or NOLs.

Once we achieved several profitable quarters for U.S. tax purposes and have satisfied other criteria we may be in a position to begin recognizing the NOLs as a tax benefit.

For the full year, after-tax, we earned $4.6 million or $0.18 per diluted share in 2007 as compared to a net loss of $7.3 million for a loss of $0.30 per diluted share in 2006. On a quarterly basis, after taxes, we earned $2.2 million or $0.09 per diluted share in Q4 2007 compared to net earnings of $2.1 million or $0.08 per diluted share in Q3 2007, and compared to a net loss of $800,000 or $0.03 per diluted share in Q4 2006.

Now we will take a look at the balance sheet and cash flow. Our cash flow from operations was $6 million in 2007 which represented a $9.4 million improvement over the cash used by operations of the $3.4 million in 2006.

In 2007 we generated the $6 million in cash from operations by adding net income of $4.6 million, depreciation and amortization of $3.2 million and other non-cash items of $700,000 for a total of $8.5 million, reduced by $2.5 million representing cash used for working capital purposes. We ended the year with $14.8 million in cash which is a $1.2 million increase from the prior year.

During the fourth quarter, we generated $4.2 million in cash from operations. This amount is calculated by adding $2.2 million in the fourth quarter net income. The $800,000 in depreciation and amortization plus $1.2 million of net changes to other assets [and] liabilities. The $14.8 million in cash we ended the fourth quarter with is a $2.6 million increase from the ending cash balance at the third quarter.

Our free cash flow in 2007 was $1.5 million which is the result of subtracting $4.5 million of capital spending from the $6 million in cash flow from operations. In 2006, capital spending was higher than cash flow from operations, resulting in a decrease in the overall cash balance. We anticipate the capital spending for ongoing technology equipment and infrastructure upgrades will be in the range of $4.5 million in 2008.

Working capital improved by $2 million from $14.3 million in 2006 to $16.3 million in 2007, primarily due to an increase in cash and receivables.

At December 31, 2007, we still maintained our $5 million line of credit. We have no outstanding obligations under this credit line.

That now concludes my detailed review of the financial results of the Company. In summary during 2007 the Company was able to drive year-over-year revenue growth of $26.8 million or 65% over 2006. Approximately 44% of this increase, close to $12 million, flowed to the bottom line.

In the same fashion our diluted earnings per share increased to $0.18 for the year and we provided $6 million in cash from operations. We believe the significant operating leverage on incremental revenue over broad periods is achievable and an important feature of our business model.

As we increase revenues, we have the opportunity to create free cash flow. We can reinvest in the business either by building capability organically or through acquisition.

Okay, that wraps up my presentation for now. Again, thank you, everyone. Looking toward to your questions.

(OPERATOR INSTRUCTIONS). Shane Kim with Camden Partners.

Great quarter. As you look at your outlook in the most -- the most recent quarter was revenue growth in the 80% range and you obviously exceeded that. And was there -- is there any seasonality in the revenue cycles for your customers?

Yes. I think our outlook for 75%, we did 83%. There is seasonality. There is oftentimes a push year end to hit some goals, customer goals. There's sometimes some budget that needs to be used up so I think, generally speaking, we do see that and that new program start. There's some ramp up and we accelerate through the year.

So were you essentially surprised? Because I think, based on your guidance, which was not too long ago, that it would sort of put the revenue figure somewhere in the $18 million range and so did somehow perhaps revenue from Q1 of '08 a surprise you sort of falling into Q4 '07 or are they mutually exclusive?

There is a little bit of that. Clearly if we could design things perfectly, it might look a little bit different. But the fact is that we are banking on very satisfied clients.

Now you had a comment about you believe that perhaps your business may be -- have some countercyclical aspects to it. In the past three months, are you seeing evidence of that? Or is that your expectation?

I think it's both. My expectation is based on my experience. In other words, what we are seeing is that there -- we do two things. We help people, we save money, reduce cost from current operations and increasingly we are helping people with their new product builds. Rather than building it first internally and then outsourcing to us three years later, they are coming to us first.

We are not seeing any slowdown in new product plans. The budgets are intact at our customers, but they are coming to us.

And if you were to look at, on a year-over-year basis you grew revenues in absolute figures of about $26 million. How much -- can you break that out versus new customers that were sort of new in calendar 2007 versus growth that came from existing customers that you had been working with in 2006 or exiting the year in '06?

Yes, I don't think that precise breakout with me. I could probably crank that for you at another point in time, but I think what we are seeing is a couple of things. We brought in a lot of new clients this past year -- 30. It's almost like drawing our business by a third in terms of clients.

What happens in our business is clients don't typically come in with huge requirements. They come in and they sample. They see how well we're doing. They see how attentive we are to them and how well we can help them accomplish goals. And then they stay with us. 95% of our clients stay with us even if their revenue is not recurring, they become recurring clients.

So the fact that we can -- we can bring them in, acquire them, we can retain them and then we can expand on them is key.

Our biggest clients are clients in the past three years we have doubled in size. Now what we need to do is do that with more people so the key strategy of acquire, retain and expand. That is what we're going to be doing.

Right. And sort of two final questions. You saw an increase so the increase in SG&A has nothing to do with currency. That's more in the cost of sales? Operating cost, so was -- have you not been occurring a bonus across -- I'm trying to get a sense for -- of this $1 million increase from Q3 to Q4.

A lot of that -- and I will let Steve address this but I will just start him off. Most of that was the double-edged sword of success when it comes to SOx compliance. It was our first time having to comply with SOx. That's not an expensive process once you get all the consultants and everybody lining up and we had to pay the piper.

Did you not incur some of those expenses during the year?

The way it works from an accounting standpoint -- this is Steve Ford speaking -- we have to recognize those expenses in the period that they are incurred. In our particular situation in 2007, we became a first-time filer effective June 30 of the year. That is because our market cap was over $75 million.

So they measured on that day. So then of course you have to engage your consultants in -- which we did in the third quarter to represent us. The bulk of the work takes place in the fourth quarter. The way the accounting rules work now, you have to recognize it in the period that it is incurred.

That's just the reason why we've got this big bulge in the fourth quarter related to SOx and we will have a little bit of that also spelling over into the first quarter of the year as the year end audit is completed. So it is a very unusual but required method that we must recognize it.

And it -- so can you give us a sense -- and I am not asking for guidance here. Obviously it doesn't appear that you are -- SG&A as a percentage of sales at 23% or close to $19 million and annualized expenses is probably not a fair figure, but you did mention you did spend some more dollars in marketing, you should have the bonus accruals.

So I am just trying to get a sense for -- we shouldn't expect SG&A to run at $3.5 million anymore. But it is probably also fair that it is not going to run at $4.7 million a quarter either.

Yes. Both of your comments I think are easily kind of referred to our actual Q3 SG&A and our actual Q4 SG&A that's out there. So if you kind of take an average of those recognizing that Q4 is a little bit higher, I think that will help you, if you do the math there, to come up with a more reasonable number which coincidentally will kind of fall in between the numbers you mentioned.

[Glenn Madsen]. [GTK] Capital.

Congratulations again on a great quarter.

This might have been covered and I might have missed it, but on the yearly guidance what is that based on? Do you have any new contract signings factored into that? Or is that just business that you -- or is part of it the standard uptake you get from these new customers as they become bigger customers?

The answer is all of the above. Our planning process is a very detailed one. We look at the -- our project backlog, we look at our recurring revenue. We make projections at a very granular level. We look of course at what's coming down the pike in terms of sales and opportunities and we take a conservative approach. One of the things we did is anything that is in our pipeline that is outside two standard deviations of our [sell], meaning statistical outliers, the real big wins. We don't even count on.

We take those down so we want to take a conservative approach. We want to pleasantly surprise, not disappoint and then we operationalize around that. We went into this year, projecting much much more conservative results than we delivered and it's because we go after some of the big wins. (multiple speakers).

But significant new project wins are not then included in the guidance?

No. In other words we don't want to depend on that.

Okay. Great. I think you guys are doing a very nice job diversifying the revenue base, especially. So keep it up.

[Tim Clarkson] with [Van Klemis].

Great quarter, guys. Always good to see the revenues go up and if the revenues go up, the nature of your business, the earnings are always going to be there.

Couple of questions. This is just the big picture question. There was an article in The Wall Street Journal I think it was on Tuesday and they talked about knowledge management and I've been trying to think about this so I can articulate what you guys do a little bit better and maybe this is oversimplifying it.

But would you say when you are processing information, the end point is to come up with knowledge that is actionable that can create profits for these business versus at the beginning point you just have a bunch of disorganized information that maybe doesn't have much meaning. Is that kind of the bulk the goal of what you are trying to accomplish in doing what you do there?

Really, what we're doing is we are helping some of the world's largest information services companies become efficient and create new products that they can grow their revenues with. So we are working with the largest information services providers. These are $5, $10 billion companies that make markets in information.

Right and the challenge is is that information is often disorganized and doesn't have a lot of value and after you do your various things, whether it is strategic analysis or XML or whatever, at the end point you have information that has now become more meaningful and more actionable and can create value for these companies.

Absolutely. That is exactly right and what we are able to do with a lot of these companies, their roots are back in print. They publish books and you can imagine an author sitting there writing a book and then he sends it to the printer and the printer publishes it. Now that their businesses have transformed to electronic information it's Internet-based information and that lends itself to a whole new approach that we are able to bring to bear, in terms of new technologies, in terms of obtaining the benefits of a distributed global workforce, in terms of creating an assembly line where these texts and activities are disassembled. They're broken up. They are performed in different places using different technologies.

It is a whole new world and we are helping them participate in that opportunity.

Do you have any idea on average what kind of return investment your clients get by spending money with you?

We save them almost half or sometimes more than half of what they otherwise would be spending.

This is a question for Steve. So we are still looking essentially on a per quarter basis that your breakeven is around $16 million and then incremental revenues above that -- 40,45% -- starts to fall to the bottom line?

We haven't actually come back with the calculation recently of breakeven as obviously our volumes have gone up as we have experienced such a significant increase in 2007 over 2006. Our breakeven is going up. I don't think what you said is an unreasonable, but I haven't come out and produced a calculation.

How about on the gross margin end? Is that 40, 45%, is that ballpark of what you are expecting in terms of your breakeven $16, $17, or $18 million that that's where -- that's how it plays out?

Generally we have been talking about a range centering around 40%. We do better sometimes, better mix, better this, better more favorable efficiencies, etc. We can improve on that. And depending on mixed and other things we may end up a little lower than that, but -- .

Now was all the dollar, was all the bonus accrued in the fourth quarter?

No, it was not. It was actually accrued over the year but as you look at our quarters and you take a look at Q1 and you look at those results that didn't exactly engender a larger bonus accrual, but as we went through the year and of course generated more favorable results the way our formula works, it was more of an accrual in accordance with how we performed. So, hopefully, that helps you.

Walter Ramsley with Walrus Partners.

Congratulations. That was a great year, great quarter. I have a few questions. The hedging operations. Can you just tell us how much the Company made on that?

The way we work it is it actually is not a number we are disclosing. Its get buried in cost of sales, but what I can tell you is that the depreciation of the currencies were significant during the year as you know.

We were able to mitigate a lot of that not only through hedging, but also through production efficiencies and a generation of favorable mix. But we don't actually disclose that exact number.

So on those contracts were there any nonrecognized profits?

Explain what you mean a little more by nonrecognized?

The contracts that you didn't actually close out that you carried over into the current year that -- unrealized?

No, they were not.

So the hedges are still in place?

Actually it is a program that we operate on a fairly continuous basis. So as contracts closed out, we take out new contracts.

Okay. I mean, it is kind of hard to believe but the rupee has actually gone up a little bit this quarter. Is that having a negative effect?

Actually not really.

Were there any stock option 123 expenses?

Those, we are actually going to be filing our K. It is due Monday. All of the disclosures associated with that will be in there and that will be filed hopefully no later than tomorrow.

The growth in 2008, you indicated that double-digit growth in annual revenues. Is that just another way of saying in the teens or what -- I mean that kind of covers a broad territory otherwise.

Yes it does. And essentially what we are doing is we are trying to take an aggressive yet conservative approach in building expectation. Obviously we just had a tremendous year and what we are trying to convey here is that we believe we can grow on top of that. We believe we can keep going. We are operationalizing around a conservative number. We are not counting on big wins, but we are working on them.

(OPERATOR INSTRUCTIONS) Joe First with First Associates.

Good morning and congratulations, again, on a very good quarter and a good year and a good outlook. I wanted to comment I was pleased to see in your press release you mentioned that you are going to be making various investor presentations at conferences and so on which, I think, is a particularly good idea because in spite of your good results like today, your stock price is down anyway. I know it is a bad market day, but your Company is not that well-known and that's a good -- I'm glad to see you are getting your story out to other people because you have a very good story to tell.

Just one quick question. The top four or five customers you are talking about that's a higher percentage of your business. Is most of these people are they a recurring type of business, knowledge management or other that's the kind of thing as long as you keep performing you are not likely to lose?

About the same percentage that we've got of recurring work overall also holds up within those top clients. So we've successfully grown the recurring work that we're doing with those top clients, importantly. And all of these clients are very, very large enterprises. We've got big programs in place for them. We are very tied into them and we have got new things in the pipeline, new things that we will be doing for them.

So I think as we seek to diversify our revenue base, we will be derisking the value proposition, no doubt, but we will also be trying to even things out a little bit. Right now that is just the way the business works and it's just the rhythm of the business. As we continue to grow and I think we've got the formula in place. We are acquiring lots of new clients. We are doing a really good job of retaining and then expanding them. I think that will just work itself out.

(OPERATOR INSTRUCTIONS) Shane Kim with Camden Partners.

What is your net operating loss?

The net operating loss we have is approximately $12 million.

At this time, there are no further questions. I would like to turn the program over to Jack Abuhoff for any additional or closing comments.

Thank you. And thank, everybody, who is on the call with us today. Thank you for your questions. Thanks for spending the time with us.

Just a quick recap, we are growing our business. We are growing at a healthy pace. We are delivering strong financial performance. We are delivering what we say we are going to deliver. Fourth quarter 2007 revenues rose $20.5 million. It was almost double $10.5 million from the same period last year. Our revenues on the year increased 65%, climbing from approximately $41 million to $68 million. We earned $2.2 million or $0.09 last quarter on approximately $4.5 million or $0.18 in 2007 overall.

We are continuing to demonstrate significant operating leverage and tending gross margins in a target range of 35 to 40% on incremental revenue, with only really minimal SG&A increases. We generated $6 million in cash from operations last year. We saw balances of cash rise. We were at $15 million December 31st and again. 2008 looks good.

We have a strong program in place. Without taking into account large possible project wins, we anticipate that we can drive double-digit annual revenue growth and deliver a second consecutive year of record revenues and strong profitability.

We also anticipate continued improvement in recurring revenue levels and that is going to be driven by new KPO engagements and expansions of existing programs. First quarter, we think it will be approximately $18 million which is 40% year over year, completing several 2007 projects and starting ramp up on 2008 stuff.

By the end of the year I would like to see us, having moved progressively forward to board toward our stated goal of $100 million in revenue. I think it was Joe asked a question about our IR program. Clearly we are going to be increasing our activities in 2008. We are scheduling a number of roadshow style investor meetings for this spring starting next Monday, actually, and we are planning to attend at least two more or more investor conferences over the coming months.

We are also going to try to increase the scope and frequency of information that we float to investors, regarding significantly new project wins and our KPO strategy.

So I think that wraps us up. Again I want to thank you all for your continued support. We very much appreciate it and we very much look forward to being with you next time. Thank you.

That does conclude today's conference. If you would like to listen to a replay of today's call you may do so by dialing 888 203-1112 or 719 457-0820. The pass code is 766-0964. The replay will be available from today, March 13th, at 1 PM Central time through April 12 at 1 PM Central.

Again that does conclude today's call. You may now disconnect.