Innodata Inc (INOD) 2008 Q1 法說會逐字稿

Good morning and welcome to the Innodata Isogen first-quarter 2008 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Vice President of Marketing and Communication, Al Girardi. Please go ahead.

Thanks, Nick. Good morning and thank you for joining us for our first-quarter 2008 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 Litigation Reform Act.

The words believe, expect, anticipate, indicate, point to, and other similar expressions generally identify forward-looking statements and speak only as of their dates. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties, including, without limitation, the primarily at will nature of the Company's contracts with its clients and the ability of clients to reduce, delay or cancel projects, including projects that the Company regards as recurring; continuing revenue concentration in a limited number of clients; continuing reliance on project-based work; the inability to replace projects that are completed, canceled or reduced; depressed market conditions; changes in external factors; the ability and willingness of our customers and prospective customers 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 we acquire; changes in our business or growth strategy; 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 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 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?

Al, thanks. Good morning, everybody, and thanks for joining us today. I'm very pleased to be with you. We're off to a real good start in 2008 and I'm very excited about the year in front of us. We anticipate that 2008, taken as a whole, will be another year of record growth and revenue supported by acquisition of new clients, expansion of client programs that are currently underway and increased investment that we're making in growing our business.

We'll start the call with an overview of first-quarter results and then I'll talk about our outlook for the year, talk about the factors that have driven our growth and that we see continuing to drive our growth going forward, and we'll also talk about our plan to enhance margins in light of foreign currency challenges. Then Steve Ford will dig into the numbers in greater detail and when Steve wraps up we'll be pleased to take your questions and your comments in our Q&A period.

First-quarter 2008 revenues increased to $18.4 million, that's up 45% from revenues of $12.7 million same time last year. We earned $833,000 or $0.03 per diluted share in Q1; this represents a nearly $1.5 million swing from a loss of $0.03 per diluted share that we reported a year earlier.

Because 67% of our costs are Indian Rupee and Philippine Peso denominated and our revenue is approximately 95% U.S. dollar-denominated, the 15% decline in the value of the U.S. dollar over first quarter last year has taken its toll on our earnings. If we had the benefit of last year's foreign exchange rates in Q1 of this year we would have earned $0.05 per diluted share more in earnings.

And we're making investments that we think will help propel us even more aggressively down the growth track. In fact, we're carrying these investments as an operating cost and that's to a tune of about $500,000 in the quarter or roughly $0.02 per share. I'll talk more about the importance of these investments and why we're so excited about them in a few minutes.

But still, despise the unfavorable currency and despite the investments we're making, we generated about $2.1 million in cash from operations in Q1 and our cash and equivalents rose nearly 30% from approximately $12.5 million at March 31st last year to approximately $16 million at March 31st of this year with another $10 million in solid accounts receivable on top of that.

Looking forward we have a strong pipeline in place and that's giving us increased revenue visibility. While second-quarter revenues will likely be in line with first-quarter revenues, we're able to see significant growth impacting both the third and the fourth quarters. So based on this we anticipate that 2008, taken as a whole, will yield another year of record revenue with double-digit growth over 2007.

We also anticipate that the quality of revenue will increase significantly. In the second half of the year we see revenue concentration improving, so where 53% of our revenue came from two clients in the second half of 2007, our current models show less than 34% of revenues coming from two clients in the second half of 2008. We also see continuing improvements in our recurring revenue base which now stands at $11.5 million or 64% of revenues, again up substantially from $7 million a year ago or 55% of revenue.

Our growth this year can be attributed principally due two factors, two factors that have worked in close combination. First, the demand for our high-end KPO services is expanding; and second, we've succeeded in building a more effective new business development capability. Let me talk to you a few minutes about each of these. Let's start first with the market opportunity.

Our primary market is the $160 billion information services and publishing industry. Companies in this sector, many of which I'm sure you're familiar with, produce high-end business information primarily for clients in healthcare, finance, law, science, tax, accounting. When many of these companies were born database technology was new and it was a big deal to get aggregated information online. So these companies developed significant infrastructure to feed their growing online businesses.

They traditionally employed hundreds, sometimes even thousands, of skilled production, editorial, technology and management professionals and oftentimes in high wage locations. But lately they're finding that leveraging this costly infrastructure for profit is becoming more and more difficult with new competitors such as Google effectively commoditizing aggregated information.

So as a result the information services and publishing companies are taking action, they're aggressively looking for ways to reduce current operating expenses while at the same time building new content products that have high relative value.

Many of our clients are finding it helpful to outsource to us tasks currently performed in-house, even high-end tasks that require experts, so that they can shift their internal resources to new product innovation. Others are engaging with us to help them benchmark their operations. Some are having us help them reengineer current operations. And still others are engaging with us to build and maintain new products.

What's uncommon about all of these engagements is that our clients are increasingly seeking more comprehensive, closer relationships with us. I'll give you a few examples taken from work we've begun this very quarter. We've just taken responsibility for the entire editorial and production workflow for the major products of a publisher of insurance and financial information.

Our team consists of analysts and editors, is creating new content and continuously updating the existing content, enriching it with metadata, assigning index terms and then publishing the product online. Our client periodically checks the work for quality, but it's essentially entrusted us to deliver the content to their subscribers.

I'll give you another example. Last quarter we signed an agreement and started an engagement with a new business unit at a large scientific and medical publisher. Researchers, writers and editors from Innodata Isogen, which include physicians trained in the United States, are helping create content for a vast online encyclopedia of authoritative clinical information that's used by doctors and other healthcare professionals at the point of care.

These highly trained medical writers and editors, located at several distinct geographic locations, are continuously updating the product which provides instant access to the latest information on medical evaluation, diagnoses, clinical management and prognosis and prevention.

In addition to expanding demand for our high-end KPO services, the second factor to which we can attribute our growth is our success in building a more effective new business development capability. We're very proud to say that over the past year we've taken sales, which used to be a weakness, and we've made it a strength. We now have in place repeatable sales processes that maintain our focus sharply on client goals on the one hand and pipeline adequacy on the other.

We've also increased client touch points, bringing technology, process and domain experts much closer to our clients. Taken together this is proving to be a recipe for success. We've signed approximately 40 new engagements in the first quarter with new or existing clients which is a 15% increase from Q1 last year and we added eight logos to our blue-chip client roster, including Honeywell International, Data Trace and the Royal Netherlands Academy of Art and Sciences.

Our pipeline is richer and more diverse and is capable of supporting our growth ambitions without having to depend on mega deals to propel us forward. And this is critical because we've seen in our business that mega deals occur unpredictably. So in this model where we strive for predictability, the law of large numbers in the pipeline gives us revenue visibility and it keeps our growth engine humming.

Now that having been said, a side benefit of this approach is that we end up covering more ground and this gives us a better radar for spotting the big deals when they form up, however unpredictably they might form up. So while the greater numbers of deals helps keeps us on the growth track, the large deals become the big rocket boosters that propel us further on a growth trajectory as they did in 2007.

The weakening of the U.S. dollar against the Philippino Peso and the Indian Rupee has taken a toll on our margins. Hedging strategies can help mitigate the effective of this, but they only work for a period of time. And the sad fact is that had we had the benefit of last year's exchange rate we would be showing another 5% more earnings for the quarter.

While there may be some signs of reversal or at least stabilization here, we're going to continue to wage a three front war for margins. First, we're going to fund investment to drive even more aggressive growth which enhances our margins due to operating leverage. Second, we're going to tap our internal capabilities better to create better workflows that result in margin improvement. Thirdly, we're going to take costs out of the business. Let me talk about each of these for a few moments.

First, the investment. I mentioned this a few minutes ago. To position ourselves our way for long-term growth in the KPO area we're now making important investments in our development. Taken together these investments cost us approximately $500,000 per quarter or approximately $0.02 per share.

These investments are entirely discretionary; it's not a cost that we need to incur to support either our current revenues or current projects or even our current growth. And while it may be tempting in light of the foreign currency issue to skimp on this investment, it would be the wrong thing to do for the business if what we're interested in is sustainable and in fact accelerated KPO growth.

This investment that I'm referring to includes domain experts, both onshore and near shore; it includes building delivery capabilities in Europe, both onshore and near shore in Europe; increasing our bench of domain experts deployable in our legal and medical and science areas; an increasing level of client side program management to help with transition process, operational alignment, benchmarking and process mapping.

The reason growth plays a part in a war for margins is our operating leverage. New KPO program revenue results in approximately 40% contribution to fixed costs and operating income. So we see a significant near-term payback on each investment area that supports growth.

The second front on the margin war that I just referred to is building new technology driven approaches to take costs out of value added tasks. Because we typically bill our clients -- and this is important -- we typically bill our clients based on units of content produced we can drive improved margins by engineering better technology and better processes and this is an advantage that many BPO companies, perhaps most BPO companies, lack such as call center companies because they build their clients based on headcount deployed.

A few times over the past couple of years we've asked solutions architects from our professional services team to help us build better production tools rather than having them out on client billing. And these are the folks that have mastered advanced text analytics and deploy solutions for some of our pickiest clients including intelligence agencies and the world's leading software company.

On projects -- now I'm referring to internal projects -- on internal projects and in areas that we've tasked them on we've seen them help us increase our margin significantly. Historically, when we were operating professional services as a stand-alone unit, the organizational walls and silos prevented us from leveraging them in this way. We're changing that now; we're breaking down the walls of the silos and intent to continue to drive this change.

The third front on the margin war is simply taking costs out of the business. We intend to be relentless in continually validating and rationalizing our cost structures, benchmarking to ensure operational efficiency in all areas. Based on this approach we intend to take out about $1 million in annualized costs without adversely affecting either our operations or our investments in growth. We will see the effects of this cost reduction beginning in the second quarter and fully baked into the third and fourth quarters.

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

Thanks very much, Jack. Good morning and thank you for joining us. Now let's take a closer look at the numbers. I will highlight the changes in revenue and cost, cash flow from operations and the balance sheet. I will then conclude with an overall summary of the financial results and some general comments on M&A.

Starting with revenues -- on a year-over-year basis revenue improved 45% or by $5.7 million from $12.7 million to $18.4 million, but was marginally lower by 10% from the prior quarter revenue of $20.5 million which was a historic high for the Company.

Comparing year-over-year, the increase in first-quarter revenue of approximately $5.7 million reflects a $4.5 million or 64% increase in our recurring revenue. As I've mentioned in previous conference calls, services that we anticipate a client will require for an indefinite period generate what we regard as recurring revenue and revenue generated from onetime projects is referred to as non-recurring.

In examining quarter-over-quarter revenue the decrease of $2.1 million is primarily attributable to non-recurring projects that have reached completion. For the three months ended March 31, 2008 approximately 63% of our revenue was recurring compared with 58% in the prior quarter and 55% in the comparable period of 2007.

Now let's take a look at direct cost and SG&A expenses. Direct operating costs totaling $13.4 million in the first quarter of 2008 were up by 34% from $10 million in the first quarter of 2007 while at the same time decreasing as a percentage of revenue from 79% in Q1 2007 to 73% in Q1 2008. The increase in direct operating cost is principally attributable to a $2.1 million increase in variable labor and other operating cost to support the increase in revenue.

Included in these costs is approximately $400,000 of the $500,000 investments in the KPO platform mentioned earlier by Jack. This $400,000 represents new domain experts, training, overseas staff and technologists. We're building a platform to support future accelerated KPO growth.

The increase in direct operating cost is also attributable to foreign exchange losses of approximately $1.3 million arising due to the 15% decline of the U.S. dollar over the first quarter last year versus the currencies of our Asian subsidiaries.

Looking at the historical trend, the U.S. dollar declined significantly in the later stages of the first half of 2007. It somewhat leveled off during the middle of last year and then went into a further decline in the fourth quarter of last year against both the Philippine Peso and the Indian Rupee. Last year we implemented hedging strategies such as the use of foreign contracts which we are continuing to do this year to mitigate our exposure on foreign currency movements.

These hedging strategies enable us to reduce some of our risk on foreign currency fluctuations. In comparing sequential quarters, direct operating cost went down by $645,000 in the first quarter of 2008. But as a percentage of revenue have increased from 69% in Q4 2007 to 73% in the first quarter of 2008. This increase in direct operating cost as a percentage of revenue is primarily due to the completion of certain higher margin projects that were non-recurring.

Despite the impact of foreign exchange on our direct operating cost, we saw our gross margin grow from approximately 21% in the first quarter of 2007 to 27% in the first quarter of 2008. The increase in revenues and the change in our revenue mix to a greater proportion of KPO services contributed to the increase in our gross margin.

Looking at our selling and administrative cost, or SG&A, you will note that they have gone up by $800,000 to $4.2 million in the first quarter of 2008 from $3.4 million in the first quarter of 2007. This increase in SG&A principally reflects increased sales and marketing expense, other payroll costs, increased professional fees and other costs incurred for compliance with Sarbanes-Oxley.

SG&A also includes approximately $100,000 of the $500,000 investment in the KPO platform mentioned earlier by Jack. Though SG&A costs have gone up as a percentage of revenue, they have declined from 27% in the first quarter of 2007 to 23% in the first quarter of 2008. You will also note that in comparison to the fourth quarter 2007 SG&A expenses have gone down by $500,000 to $4.2 million.

Fourth quarter reflected the higher regulatory expense of being a first-time filer in 2007 under Sarbanes-Oxley, or SOx, as well as significant marketing initiatives and increased bonus accruals.

In regards to taxes, the Company has established a cumulative valuation allowance due to net operating loss carryforwards, or NOLs, of approximately $12 million. Once we achieve several profitable quarters for U.S. tax purposes and have satisfied other criteria, we may be in a position to begin recognizing the NOL as a tax benefit. In addition, certain overseas income is neither subject to foreign income taxes because of tax holidays granted to us and not subject to tax in the U.S. unless repatriated.

Looking at our income statement, after tax we earned $833,000 or $0.03 per diluted share in the first quarter of 2008 as compared to a net loss of $643,000 or a loss of $0.03 per diluted share in the first quarter of 2007.

Now let's turn our attention to the balance sheet and cash flow. Our cash flow from operations was $2.1 million in the first quarter of 2008 which compares to a use of cash of $500,000 in the first quarter of 2007. We ended the quarter with $16.1 million in cash which is a $1.3 million increase from the prior quarter and a $3.6 million increase over the balance at the end of Q1 2007.

Free cash flow in the first quarter of 2008 was $1.3 million which is the result of subtracting $800,000 of capital spending from the $2.1 million in cash flow from operations. During the next 12 monthly anticipate that capital spending for our ongoing technology, equipment and infrastructure upgrades will be in the range of $4 million to $5 million.

Working capital improved by $600,000 from $16.3 million at the end of 2007 to $16.9 million at the end of the first quarter of 2008 primarily due to the increase in the cash balance. At March 31, 2008 we still maintained our $5 million line of credit and we have no obligations outstanding under this credit line.

In summary, during the first quarter of 2008 our revenue grew by approximately 45% over the comparable period of 2007 and gross margin improved 27%. During the quarter the Company earned $833,000 or $0.03 per diluted share. Overall our cash from operations was $2.1 million and working capital improved to $16.9 million.

In regards to M&A, I'm now seeing some very interesting opportunities in the market. My background and experience during the 10 years prior to Innodata Isogen has included a number of strategic acquisitions as a CFO in a public company. Now that we are in a financially strong position I will be more focused on finding and examining M&A opportunities. I will be looking for deals that are consistent with our KPO strategy, that will help reduce our customer concentration and will be accretive to earnings and cash flow.

Okay, that wraps up my presentation. Again, thank you, everyone, for your time. Looking forward to many questions that you may have.

(OPERATOR INSTRUCTIONS). Matt McCormack, FBR.

Good morning. The first question, you had mentioned the top two clients at 50% and change last year and expect it to go to the mid 30's. If I'm doing the math on that that would be a decline in absolute dollars of anywhere from 10 to 20%. So I just wanted to verify my math there and if you could just kind of talk about what is going on with one or both of those clients?

First of all, this is Jack. We're doing very well with both of those clients. We are projecting that certain large projects that we're working on for them are -- where the revenues of that are going. Most importantly, we're projecting that other revenues are taking that place. So what we're achieving based upon the projections that we're now doing for the year, is we're achieving much greater revenue diversity. We know that revenue diversity has always been one of our challenges.

We're also looking at new projects and new engagements, many of which are recurring ones that are replacing that revenue. We're also looking at new engagements including recurring engagements in those clients. So things could shift, but if they do shift it would likely result in significantly better performance than we're modeling right now.

And is it fair -- would it be fair to say that the work that is going away is more BPO in nature and not necessarily KPO, so we would expect the actual quality of the revenue also to increase?

Absolutely. And that's one of the great attributes of KPO revenue, it tends to be recurring revenue which is of much higher quality, also tends to be higher margin yielding work.

Right. I'm not sure if you mentioned what the percentage of KPO was this quarter and where you think that will be for this year?

Most of the growth that we're showing is indeed coming from KPO work. We see that to be overwhelmingly the area of growth for us. Importantly, the publishing services that we do support that growth oftentimes, they're components of publishing service including conversion and digitization that are often hand-in-hand. So we don't break out that number separately, but when we look at what's driving the growth going forward it's all centered around the high end KPO engagements.

Okay. And in terms of the investments in development, can you just give us a little bit more detail on which countries most of that spend is going to go to? What kind of -- specifically what kind of KPO or domain expertise on the KPO side you're looking to invest in?

Sure. Overwhelmingly like -- I mentioned earlier what we're seeing is an opportunity to get progressively closer to our customers. We're getting closer to them both in how we're working with them on a strategic level and we're getting arguably closer to some of their core services. So we're engaging with them in a different way. It brings more value and it also requires more investment on our parts.

We are expanding our footprint. We're no longer thinking just in terms of the Philippines or the Philippines and India. In fact, we're actively involved in other places. I'm not going to go into a great deal of detail about where those places are now because this is some early stage work we're doing. We are on the ground there, we are building and expanding and that's progressing very, very well.

[Dana Buska].

Hi, guys. I've got a question about the guidance going forward for this year. I was noticing that you guys could still achieve double-digit growth with a flat second half of the year or even slightly down. And I was just wondering if that's something that we should be anticipating or are you planning on having stronger growth than you did last year in the second half of the year?

We're planning on growth in the second half of the year. So we're not targeting being down in the second half, we're planning on -- we're working hard to be up in the second half.

So year-over-year you'd be -- in the second half of the year you'd be up?

That's correct.

Okay. Great, that's my question.

Joe [First], [First] Associates.

Good morning, gentlemen. I'm glad to see that you're making such progress in changing to the knowledge management area, getting a better type of revenue and more consistent type of revenue. But your performance in the first quarter from an earnings point of view is extremely disappointing. And I realize a big part of it is because the value of the dollar, but I'm a little confused on exactly what that might mean in the future.

If the dollar stabilizes and just -- the relationship stays the same between the different currencies now, does that mean the $1.3 million that you were hurt by last quarter would go away and then you would have another $1.3 million in earnings if that were the case?

I'll take a quick stab at that and then I'll ask Steve to elaborate, maybe he can correct me where I may over simplify. I see that foreign exchange in the quarter hurt us by $0.05, so we did $0.03 of EPS, we made another $0.02 of investment which I think is well-placed investment and $0.05 went out the door in terms of foreign exchange.

If that stabilizes I guess that $0.05 is in there, but we're going to plan on making back part of that $0.05 through the cost savings that I referred to. We're going to plan on making more of that $0.05 back based on the other initiative we have -- two initiatives in our margin where one being using technology better to take cost out of production and then the third being we're going to sell through it.

So if you look at our operating leverage or our flowthrough of 40% of an incremental sales dollar, funding fixed costs and bottom-line, it essentially means we needed this quarter to sell $3 million more than we would have last year to be in the same place. So we're going to lower that by -- making some of that back on the savings. We're going to lower that by taking some of that off in terms of technology save and then we're just going to sell through it, we're going to grow through it.

So the answer to the question is, no, the $1.3 million would still be there but you think you're going to offset it by other means?

Offset it by other means and that's if the currency were to stabilize.

Correct. Now one more question. You're always saying about how much money you save your clients. Could you raise your prices slightly to help make up for that?

Yes, we definitely see the ability to do that.

And another thing, this $500,000 of expenses or investment that you're spending rather than capitalizing which is fine. Is that a continuing $500,000, you'll be doing the same each quarter or was that a one time type of thing?

That right now is continuing, but we're going to continually be evaluating where we're getting pay back there and making adjustments.

And that of course is being adjusted by the $250,000 per quarter that you're reducing from the BPO and other expenses?

That's correct.

That's good. Well, let's hope you can -- this model, you're doing very well on the revenue side, let's hope that you can make it a profitable business because that's the bottom-line.

Absolutely.

Thank you.

Jim [Hansberger], Smith Barney.

I've just got a couple quick questions. Now that you're in a cash flow positive trend here and you're obviously in the black on the income side, I was just curious, did you all have an internal target on your net profit margin? And what would be the average of some of your more mature peers relative to that net profit margin?

And then my second question was -- just related to the cash flow. I know you mentioned that you will be acquisitive in the coming year and I was just curious if the cash flow and the cash flow on the balance sheet, if that would be used or if it would be more of a dilutive type of deal with your stock?

I guess let me take the second question first and again let me ask Steve to chime in. I think we're going to be careful in the way we dilute equity. We've got a good track record thus far in that area and I think we would look to continue that. At the same time we would look to tie in acquisitions that we would make to their near-term performance.

In terms of benchmarking, there are some sources for benchmarking -- are able to look at what we're able to do on certain projects and we tend to take a much more technology focused approach than other companies who use more of a pure labor arbitrage model. You get better profit flowthrough out of projects than many of our competitors. That's anecdotal. In terms of benchmarking there aren't a lot of our peer group, our competitors who are public companies, we lack some of the (multiple speakers) otherwise.

I understand. Also just one last question. Have you all ever considered to use some of this cash flow to buy back some stock just given that it seems like it's -- on a valuation basis it would seem to be undervalued and just the ratio of amount shares outstanding to total revenues that might make sense, especially as your cash flow is in a positive trend?

This is Steve Ford. Very good point. We keep a close eye on that and we evaluate that versus the internal investments we're making to grow the business, and we also evaluate it in terms of any possible M&A opportunities that we have. But we are keeping a close eye on it. We still have an amount available to us of approximately $680,000 and we certainly have, if we deem it appropriate, access to the Board to get further authorizations if in fact we would decide that's what we want to do. So we do keep an eye on that.

Okay, thank you, guys.

Tim Clarkson, Van Clemens.

I wanted to ask -- you mentioned in the first quarter about a potential of some large projects out there and you also referenced it in terms of your new sales strategy. What would you define as a large project and are there large projects pending?

There are large projects out there. We sort of take a two-pronged approach to large projects. On the one hand, when it comes to pipeline management and thinking about growth, projecting growth we don't depend on them. We put them out of our mind, we pretend they're not there.

On the other hand, we have a, call it a swat team of people who focus entirely on those large projects and try to make them realities, so we don't bake them into our guidance, we don't think about them, we don't depend on them. At the same time we work very hard on them and I think I used the term -- it's like a rocket booster. When we land them it has wonderful effects within the model.

Thanks.

Gary Siperstein, Eliot Rose Asset Management.

Good morning. I just want to follow up on a question that was asked earlier. A gentleman asked about the M&A and whether you use stock. I think, Steve, in your earlier comments you were clear that whether it was a cash or stock deal on any potential M&A you'd only look at something that was accretive. Is that true?

That's exactly what we're looking for, something accretive. And also it has to fit within our KPO strategy.

Okay. And then secondly, following up on the buyback question, with this quarter under the belt, even at $0.03 instead of maybe $0.10 without the currency situation and the KPO investment it's versus negative $0.03 last time. So you picked up $0.06 in trailing earnings, so you're at about $0.25 of trailing earnings now, 16 PE on trailing earnings and ostensibly, based on your guidance, hopefully things are going to be getting better.

So that being said, you mentioned the CapEx in the next 12 months going forward of $4 million to $5 million, your cash flow in the quarter was $2.1 million, again with your guidance on improvements going forward, I think we could annualize that at better than $8 million.

So my question is, notwithstanding what we're doing on the M&A front, it seems like there's room there to use some of that excess cash flow to buy the stock back in. Again with the stock under pressure and with a modest 16 trailing PE and your positive prospects going forward, it seems like we'd be able to have our cake and eat it too and consider that in the mix.

Gary, I think you're making a good point and it's something that has been a continuing discussion at the Board level. As Steve said, there is authorization there, there's the ability to get more authorization. The issue when we debate that is two things.

First, we see a market forming up where there are some very interesting opportunities for making acquisitions. Secondly, when we look at the restrictions that are placed around us relative to buybacks and the proceeds that we would, and I think you would like to see us devote to that, it doesn't make for a meaningful absorption of shares, it almost gets lost in the mix.

So we're weighing those two very much with a shareholder's interest perspective and I think we're going to continue that discussion and continue that process. If we can't make some real headway in the next several months on the M&A side I think that may -- swinging to that side may make more sense.

That's fair, Jack. I guess I would say even the $1 million a quarter, 250,000 shares a quarter would at a minimum mitigate the extra dilution from options. So I think it's certainly better than nothing and maybe it wouldn't make a material difference for the shares outstanding but it would mute any potential growth in the shares outstanding. I just want to ask one last question. What's on the agenda on the IR front?

We've got Stan Berger who I know you know. He works with us as a consultant. He's a very talented guy, very well respected, has demonstrated great capabilities for us in terms of lining up non-deal roadshow type meetings which have proven to work very, very well. We find that when we have an opportunity to tell our story in one-on-one meetings that the results from that are very positive. We intend to step up those activities. We're also going to be presenting at FBR's investor conference later this month.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS). Terry Highland, Van Clemens.

It's Perry actually. But it looks like all my questions have been answered. So the only one I have left is -- you're always looking for acquisitions, accretive or what have you. At these prices do you get concerned that you might be acquired?

I don't think that we would look at it from a -- I don't think we'd categorize a concern there. I think that we'll look at any opportunities that come our way and it's conceivable that there would be some attractive opportunities that would come from the buy side also.

And then like you said earlier, projects, they could just come anytime and they're not factored in the growth. So if they come they're just frosting on the cake if you got a big project?

That's the way we're looking at what I refer to as the mega projects. So if we look at our history over the past several years when we were primarily in the digitization business, we were very dependent on large digitization opportunities. What has changed with our evolving strategy of shifting to KPO is that we're able to have much more revenue visibility, we're able to look at a pipeline and a pipeline of high revenue quality of recurring revenues and build on that base. That's a huge change for this business.

Joe First.

Most of my questions have been answered, but I just have two things. I wasn't quite clear on your answer to Tim Clarkson concerning these mega deals. I think he asked are there any that you're actually working on now, that there's a chance of anything doing. And you said they may come, they may not. But are there any that you see out there that there's always a possibility of getting?

Sure, Joe. And I think in the ambiguity of our answer what you see is the schizophrenia that we've imposed on ourselves. We're working really hard on them, but we're not depending upon them. So we're thinking about them but we're not thinking about them. Yes, there are some very big things that are out there that we're working on that we're very excited about, but we're not thinking about them.

And then one other comment on -- a couple of people mentioned about buying back stock. I also would like to see you buy back some stock at the appropriate price -- not even a lot. For the main reason it shows the market that you have confidence in your own future and also will offset the increased number of shares because the options are granted. That's about it. Thank you.

Thank you.

Jim Hansberger, Smith Barney.

I've got a couple quick follow-up questions. How do you actually define accretive to earnings? Does that mean within the fiscal year or does that mean immediately? Or -- I know some companies think that accretive earnings is within the next two years. So do you all have a general model there?

Yes, we do, as a matter of fact. This is Steve Ford. And it would be accretive, I mean, in the best of all cases immediately but definitely within the first year's operations. So if there are some initial costs or charges that are necessary, they would be taken. But the idea would be that on a go-forward basis operationally it will be an accretive deal is what we're looking for.

Okay. And then just a follow-up to the buyback question. How about the insider buying? I don't know where your window is, but is the management team and the Board looking at buying the stock here just given the outlook that we've heard and the cheap price?

I think that it's a very attractive investment opportunity. I bought quite a bit of stock last year. This year I put a pool in. But I think that others on the Board are probably viewing it similarly.

At this time I would like to return the call back to Mr. Jack Abuhoff. Please go ahead, sir.

Thank you all again for joining us. I'll quickly recap the discussion. We're growing our business at a healthy pace, we're delivering strong financial performance. Although the foreign exchange situation has hurt profitability and probably to the tune of $0.05 per share and we're making investments that we think will further accelerate our growth to the tune of $0.02 per share, nonetheless we saw $0.03 per share, we generated $2.1 million in cash from operations. Our balances of cash and equivalents rose 30% to approximately $16 million.

Looking forward we have a strong pipeline in place. We feel we're really going into 2008 with a good head of steam. We see continuing improvement in recurring revenues driven by new KPO engagements and expansions of programs. We see or we're foreseeing a decrease in client concentration and we're excited about the year. So thank you again for your support. Thanks for joining us today. We all appreciate it and we look forward to being with you next time.