Innodata Inc (INOD) 2008 Q3 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, Mr. Al Girardi. Mr. Girardi, please go ahead.

Thanks, Leslie. Good morning, and thank you for joining us on our third quarter 2008 earnings conference call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen and Steve Ford, Chief Financial Officer.

Statements made during this call and answers to your questions are intended to provide abbreviated, unofficial background to assist you in a 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 the 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 client and prospective clients to execute their business plans, which give rise to their 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 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. And now I'll turn the call over to Jack Abuhoff.

Thanks, Al. Good morning, everybody. Thanks very much for joining us today. During today's call, I'll provide some context for our third quarter results. I'll talk about how we see Q4 shaping up and I'll take you through our management priorities as we plan for 2009. Then Steve Ford will walk you through a more detailed review of our numbers, and when Steve concludes we'll open the call up for your questions. Revenue in Q3 was slightly lower than we had anticipated. We had projected an additional $750,000 to $1 million of revenue in Q3 from a project we were due to perform for a major insurance company.

The project, which had not yet begun, was suspended in September as the company suffered a liquidity crisis that resulted in a highly publicized Federal Reserve bailout. But perhaps the biggest impact of the financial crisis has been on our share price. This quarter, we saw our stock price decline from around $2.80 on June 30th to around $1.55 today.

I don't need to detail here the historic destruction of value we have all witnessed in the equities markets. Many good companies are suffering, including most of the BPO sector. That said, I believe that the fundamental strength of our business and business model, reflected in healthy increases in annual revenue growth and improved profitability will be reflected in our share price as markets normalize. We are better positioned than most companies to perform well in this challenging economic environment.

The main reason for this is the simple fact that we, like companies in the outsourcing sector generally, help clients reduce costs. Just in this past quarter, we've significantly stepped up activities with several clients who have come to us with the goal of accelerating editorial and operations outsourcing to reduce ongoing costs, as well as new product development costs. In addition, for us, like other BPO companies, the strengthening of the US dollar that we have experienced is the functional equivalent of a cost reduction.

This is because we receive payments for services primarily in US dollars, which we then convert to foreign currencies to pay our costs in India, the Philippines, Sri Lanka and Israel. When the US dollar strengthens, we need fewer dollars to pay our offshore costs, leaving more dollars to flow to profits.

Now, the problem for the BPO sector generally, however, is that many BPO companies serve, many times exclusively, the hardest-hit financial services and retail sectors. In fact, according to NASSCOM, the banking, financial services, insurance and retail sectors together accounted for almost 50% of India's total IT BPO export revenues in 2007.

But their problem is not our problem. Other than this one insurance company, the new pass-through client for which we were slated to perform a one-time project in Q3, our clients are primarily in the information and media space. Indeed, 87% of our Q3 revenue came from the information media companies, just 5% from retail businesses and just 1% from financial services companies.

So unlike the BPO sector generally, we are not dependent on the financial services or retail sectors. Another reason I believe we can outperform the BPO sector is that we are not dependent on bank financing. We have maintained a strong balance sheet, with more than $14 million in cash, even after buying back close to $2 million in stock over the past few months. And we have no debt on our balance sheet to service.

Our current cash and projected cash flows are sufficient to fund our operations and our growth. For these reasons, we believe that we are positioned to show improving fundamentals, both revenue and earnings, even in the teeth of this current financial crisis. In Q4, we believe that revenues could be as much as $20 million or more, helping us achieve a second consecutive year of record revenues.

As we prepare for 2009, we are very focused on the fundamentals of revenue growth and earnings and accelerating the changes that we need to make to take the company to the next level. As CEO, my priorities are, one, continued transformation of our delivery model to accommodate our KPO opportunity, two, cost control, three, currency risk exposure, four, expansion of business with our largest clients, five, driving recurring revenue growth in our expanding client base and, six, further developing and expanding the overall capability of our executive management team. I'm going to touch on each of these briefly.

KPO delivery, first, we will continue to morph our organization in ways necessary to accommodate the dramatic changes that we're driving in our revenue base. Unlike several years ago, when our business was principally digitization, we foresee most of our new business in 2009 coming from progressively higher-valued KPO engagements in which we assume responsibility for creating and managing technology-enabled workflows, staffed by a highly skilled global workforce, to manufacture the content that our clients then sell and distribute.

I will continue to make the changes necessary to the organization to accommodate our ability to perform increasing amounts of this highly specialized work. This will involve continued enhancements to our implementation model and our capabilities, enabling us to deliver a relatively wider array of end-to-end content work streams that include high-end editorial capabilities, product engineering and operations reengineering.

At the same time our KPO market opportunity is expanding, I also see stepped-up activity in e-book-related services, the success being enjoyed by the second-generation Sony Reader and the new Amazon Kindle, has stoked demand for our e-book services.

In anticipation of this demand, early this year we invested in developing an e-book solutions center and new proprietary XML-based technology to address specifically e-book requirements. These investments are paying off well and have resulted in our having become the leading e-book services provider for the two companies most widely recognized for their innovative e-book reading devices and distribution models.

Importantly, we believe that we are still at the early stages of what might be referred to as the e-book revolution.

The second key element of our strategy is cost control. In terms of cost control, we have identified approximately $650,000 per quarter, or $2.6 million per year, of operating margin improvements on the existing level of business that we can implement within the next several months. One-time costs to obtain this benefit would be approximately $600,000 to $700,000.

In addition to this, we expect to obtain significant price adjustments from clients on engagements that had challenging margins and we have begun reengineering efforts on a number of production workflows that will bring significant benefits. We believe that these cost savings, price adjustments and reengineering efforts can be largely effectuated in Q4.

We are also putting in place plans to manage costs closely in 2009. As important as it will be to build our franchise through continued strategic investment and KPO, we also recognize that these are challenging times. Therefore we intend to emphasize free cash flow as we manage for increased revenues and increased profits.

The third element of our strategy involves foreign exchange protection. In recent weeks, we have witnessed a return to the exchange rates that were prevailing 18 months ago. The hedges that we had in place in Q3 cost us approximately $750,000. In the fourth quarter, the last of our hedges rolled off at a cost of about $300,000.

Going forward, we anticipate putting in place a hedging program that provides a level of downside protection for the cost while leaving us with the benefit of the upside. Therefore, in Q1 2009, if the currencies remain where they are today, we would expect to see an additional benefit of approximately $600,000 per quarter, offset by the cost of our new hedging strategy, which will probably be in the range of $250,000 to $300,000 per quarter.

The fourth element of our strategy is driving new business at our largest clients. We will continue to drive business with our largest clients. We will exploit opportunities to help them reduce ongoing costs and to develop new content-related products. Content creation, management and distribution processes are analogous to the plan, source, design, make and deliver life cycle from a supply chain perspective. Our value proposition for the media, publishing and information services space stems from the need to enhance efficiencies across our clients' content supply chains.

Because we help clients reduce their operating and overhead costs, because we help them shift more capital and product quality and new product features, because we permit our clients to respond to market demand more rapidly and structure their organizations more nimbly, I believe we are becoming increasingly integral to our clients' corporate and competitive strategies.

In the field, we continue to see changes in the way our largest customers do business with us. We're providing more end-to-end services, more high-end requirements that require multishore approaches and our services are deployed more strategically. And, again, all these changes work in our favor.

We will continue to work to expand the business we do with our largest clients, both in terms of scope and real dollars. The fifth element of our strategy is driving an expansion of our base business, the business other than the business we do with our largest clients. We will continue to drive an expansion of the base business with an emphasis on recurring revenue.

From Q1 through Q3, we grew our recurring revenue base by $7 million in annual contract value. In fact, from just Q2 to Q3, our recurring bookings increased by 75%, from $4 million to $7 million in annual contract value and our project bookings increased by 64%, from $7 million to $11.5 million of total contract value.

In the third client, 40 clients, seven of them brand new, awarded us new business, and many of our existing programs continued to grow. Throughout the year, including Q3, we saw steady improvements in the value of our pipeline. We will work to increase the amount of new business we sign by continuing to execute and improve upon the formula we put in place at the end of 2006, consisting of differentiated marketing and lead generation, a solutions-driven sales process and active sales funnel management.

Management team. I am proud of the fact that we are able to retain our top talent. Still, keeping with our market opportunity means refreshing top management sometimes. I will be focused on ensuring that the executive team is up to the tasks that lie before it.

I believe that our plan will result in continued growth in Q4 and beyond into 2009, with significantly improved levels of profitability. As we execute our plan, we'll look to step up investor relations activities to ensure the message reaches investors. With time, we hope that the markets will return to some level of normality so that our performance translates to share price.

We believe that investors will recognize the economic fundamentals that are driving the outsourcing industry forward and recognize that the sector is positioned to benefit from the currency shift. Further, we believe that investors will recognize that our company has several particular advantages relative to its peers, including a strong balance sheet, record growth, little direct exposure to the faltering financial services and retail sectors and no dependency on bank financing or credit markets.

To reiterate, in Q4, we believe that revenues could be as much as $20 million or more, helping us achieve a second consecutive year of record revenue. Looking into the beginning of next year, we see continuing revenue improvement.

With regard to 2009, we're focused on delivering both revenue and earnings improvement. Taking into account the uncertainty of current economic environment and the potential for a prolonged economic contraction, we're also focused on cost management.

We're taking a series of actions to improve future earnings and cash flow. We have identified approximately $650,000 per quarter of additional operating margin improvements on existing business that we can implement within the next several months. One-time costs to obtain this benefit would be approximately $600,000 to $700,000. On top of that, we expect to have obtained significant price adjustments in Q4 and to have done some production reengineering that will also bring significant benefit.

To quickly reiterate our management plan, our management plan is focused on continuing to enhance our high-end services implementation and delivery capabilities while managing costs down, lowering our year-over-year currency impacts, driving revenue among our top clients and driving recurring revenue especially among our expanding client base.

We are energized by the prospect of going into 2009 with increasing revenues from our most significant clients, a robust pipeline of new opportunities with new and existing clients, the prospects of a lower cost structure and a foreign currency strategy that will help capture and preserve the benefits from a return to a more normalized exchange rate.

Now I'm going to turn the call over to Steve Ford for a few minutes, and when Steve wraps up we'll be happy to take your questions.

Thanks, Jack. Good morning, everybody. It's good to be here with you. As Jack mentioned, I'm going to walk you through our third quarter results. We'll look at changes in revenue and cost, changes in SG&A, cash flow from operations and we'll review the balance sheet.

I'll conclude with an overall summary of the financial results and some comments on M&A. Okay, now let's take a look at the numbers.

I'll start at the top. In the third quarter of 2008, revenue increased by about $200,000, rising from $18.1 million last year to $18.3 million, and up 3% from revenue of $17.9 million in the previous quarter.

Looking at the year so far, revenue was up 16%, or $7.4 million, rising from $47.2 million for the nine months ended September 30, 2007, to $56.4 million for the nine months ended September 30, 2008. After taxes, we earned $1.1 million in the third quarter of 2008, or $0.05 per diluted share, as compared to earnings of $2.1 million, or $0.08 per diluted share in the third quarter of 2007.

On a year-over-year basis, our net income after tax declined by $300,000, from $2.3 million in the first nine months of 2007, $2 million in the first nine months of 2008. We customarily separate our revenue into recurring and nonrecurring categories. Recurring revenue consists of services that we anticipate a client will require for an indefinite period. In contrast, services for discrete projects generate revenue that we regard as nonrecurring. In the third quarter of 2008, approximately 75% of our revenue was recurring and 25% was nonrecurring, compared with 70% and 30%, respectively, for the similar period in 2007 and 71% and 29%, respectively, in the prior quarter.

Year over year, the $7.4 million increase in revenue reflects a $5.2 million increase from recurring revenue and a $2.2 million increase from nonrecurring project revenue. Examining the revenue for sequential quarters, the increase is primarily attributable to the increase in recurring revenue, partially offset by decline in nonrecurring projects that reached completion.

Nonrecurring revenue declined by $560,000, whereas recurring revenue increased by $1 million. Now let's take a look at direct [cost] SG&A. Direct operating costs were approximately $13.2 million in the third quarter of 2008, up by 6% from $12.5 million in the third quarter of 2007. Increase in direct operating cost is principally attributable to approximately $750,000 in losses from the settlement of foreign currency forward contracts. Direct operating cost as a percentage of revenue were 72% in the third quarter of 2008, as compared to 69% in the third quarter of 2007.

As we do incur substantial amount of cost to [oversee] any strengthening in the US dollar against the currencies of the Philippines and India, where we have the majority of our employees and facilities, it positively impacts our results. On a third quarter year-to-date basis, direct operating cost increased by 6 million, driven principally by the increase in compensation costs and other costs in support of increased revenue and the weakened US dollar, primarily in the early part of 2008, as compared to 2007.

Direct operating cost as a percentage of revenues for the nine months ended December 30th, 2008, and 2007, were 74% and 73%, respectively. In regards to currency exposure, we anticipate putting in place a hedging program that protects the downside risk and also leaves us with the opportunity for benefits on the upside for costs. For example, if currencies were to remain where they are today, we'd see a benefit in 2009 of approximately $600,000 per quarter, offset by a cost in the range of $250,000 to $300,000 per quarter.

In looking at the sequential quarters, direct operating costs as a percentage of revenues went down to 72% in the third quarter of 2008, from 77% in the second quarter of 2008. This decline in direct operating cost as a percentage of revenue is principally due to the benefits of cost control measures instituted by us in the second quarter, an increase in margins due to higher revenues and reduced incentives.

In addition to these reductions, we have identified approximately $650,000 per quarter of operating margin improvements on the existing level of business that we can implement within the next several months. One-time costs to obtain this benefit would be approximately $600,000 to $700,000. Looking at our selling and administrative cost, or SG&A, you will note that the third quarter cost in both years were $3.6 million.

An increase in professional fees and consulting costs during the 2008 period over the 2007 period was substantially offset by the benefit of cost-control measures and reduced incentives expenses. As a percentage of revenue, SG&A was 19% and 20% for the three-month period in 2008 and 2007, respectively, reflecting a sustained cost level on the higher revenue amounts.

During the first nine months of 2008, with the same period a year earlier, SG&A expenses as a percentage of revenue remain the same, about 22%, but increased in absolute terms by 12%, climbing from $10.5 million to $11.8 billion, because of higher payroll costs and increased professional fees.

During sequential quarters, SG&A expenses have come down by approximately $430,000 in the third quarter of 2008. This is due to cost-control measures taken by us in Q2 to lower our expenses and reduce incentives, partially offset by increased professional fees and other consultancy costs. In regards to taxes, the Company has established a cumulative valuation allowance due to net operating loss carryforwards, or NOLs, of approximately $12 million.

For the three months and nine months ended September 30, 2008, and 2007, we've recorded a provision for income taxes which was principally comprised of foreign income taxes attributable to our overseas subsidiaries. We recorded no provision for US income taxes, other than for alternative minimum tax, because we utilize net operating losses for which we had previously reported a valuation allowance.

Now let's turn our attention to the balance sheet and cash flow. Cash flow from operations was $3.7 million in the nine months of 2008, compared to $1.8 million in the similar period of 2007, thus representing a significant increase in cash from operations. We ended the quarter with $14.1 million in cash, which was a slight reduction from the end of 2007, by $700,000. But the cash balance of $14.1 million as of September 30, 2008, represents an approximate $2 million increase over the balance of Q3, 2007. The decline in our cash balance in 2008 as compared to the December 2007 balance s principally due to the repurchase of 606,000 shares of the Company's common stock for approximately $1.9 million as part of the stock buyback program authorized by the Board of Directors in May of 2008.

Our free cash flow in the first nine months of 2008 was $1.7 million, which is the result of subtracting $2 million of capital spending from the $3.7 million in cash flow from operations. During the next 12 months, we anticipate that capital spending for our ongoing technology, equipment and infrastructure upgrades will be in the range of $3 million to $4 million.

We have a $7 million line of credit. We have no outstanding obligations under this credit line as of the end of the current quarter. Working capital improved marginally by 100,000 as of September 2008, from the end of 2007.

We believe that our existing cash and cash equivalents, funds generated from our operating activities and funds available under our credit facility will provide sufficient sources of liquidity to satisfy our financial needs for the next 12 months. In summary, year-over-year revenue grew by 1% in Q3 and by 16% in the nine months ended September 30.

Year over year, pretax earnings were lower in Q3 by approximately $670,000 and remained relatively flat for the nine months ended September 30. During sequential quarters, our revenue increased by 3% and recurring revenue increased to represent 75% of all revenue for the third quarter of 2008 compared to 71% in the second quarter.

Net income was higher in the third quarter of 2008 as compared to the second quarter, primarily due to an increase in margins from higher revenue, cost-control measures and reduced incentives. We generated $3.7 million in cash from operations in the first nine months of 2008, which is significantly better than the $1.8 million we generated in the first nine months of 2007.

In regards to M&A, we're continually examining good opportunities in the markets. The current economic and financial turmoil poses a strong challenge, but also represents a good opportunity for us. We are in a financially strong position and we will benefit by combining both organic and acquired growth. By also continuing to focus on M&A deals that will help reduce our customer concentration and be accretive to earnings and cash flow.

Okay, that's it for me for now. Thanks, everybody. At this point, operator, we're ready to field some questions.

Thank you. (Operator Instructions). Our first question comes from Tim Clarkson of Van Clemens Capital. Please proceed with your question.

Hi, guys.

Hi, Tim.

Jack, Steve and Al. A couple of questions. One, in terms of -- I have a client that's actually in the KPO area, knows a lot more about it than I do. Of course, that doesn't take much. But the one thing that he's concerned about in general about KPO is what he calls production issues, the ability to hire qualified people and to grow your revenues. And could you just talk a little bit about the potential issues there and in terms of technology, too?

Yes, I think that's where there are benefits for us and where there is strength in our value proposition. It is hard. It's hard to find the right people. It's hard to mobilize people using the right technologies to accomplish some of the projects that our customers need. But that's what we're good at. We're good at multishore approaches, where we combine people in different locations, working in a single content supply chain to accomplish a goal, and we're good at looking at ways that we can make those supply chains even more efficient in using technology. We're applying technology in new ways and differentiating ways and our clients are very pleased with that.

Could you explain -- you've got 40 new deals. Could you explain maybe one of the simpler deals where you're actually using KPO to create value for your clients?

Sure. I'd be happy to. There are so many detail examples --

The simplest one.

The simplest one is we've got a client who is publishing legal and financial information and they are increasing their product portfolio, they're expanding their products, and rather than building the infrastructure, the people and the technologies internally that they need in order to do that, they're coming to us and they're saying, we'd like you to support that for us. That's probably as simple as it gets.

Great. One other question and I'll let other people here. Just in this area of digital books. What's the driver? How many digital books do you need to sell to pay for the digitizing of a book, and at what point does it become an issue where someone like an Amazon wants to just have a certain number of books just to make the overall service more attractive?

I think it's a great question. It's a very exciting opportunity that we see there, and what makes it so exciting is we're both in the early stages of it and we're well prepared for it. So we spent a bunch of money and investment in the early part of the year to build out a solution center with some good workflow and XML-driven technologies to make the costs competitive in terms of creating the books.

And if you just look at what Amazon's saying about its projections for Kindle and for e-books generally, they're saying that supply hasn't kept up with demand. They need more. Their clients want more. If you look beyond that, we see that Harlequin, for example, is the first publisher to take its entire -- its entire list catalog and make it all into e-books, and they're saying sales are exploding. The market today is still small.

I think the aggregate sales of e-books is probably a couple hundred million dollars, but people that are watching that industry closely are saying that it's going to be a $3 billion to $5 billion industry in the next several years, and we see so many different publishers embracing that. Because we're working so closely with the leading providers of devices and distribution, we're building relationships with a lot of the publishers that we never knew before, so we're getting to work with them and we're getting to do other things with them, too, so it's just a very, very exciting opportunity for us.

Okay, one last question on that. On digitizing books, is there an XML dynamic to that?

Absolutely. In creating the e-book, there are a couple of different ways that you can go about it. There's an old-fashioned way, where you're using desktop-design base tools in order to create the e-book, but that is inefficient and the quality is poor. And what we've done is we've created XML workflows that make I more into a manufacturing process and a much more efficient process.

Tim, you asked also, how many e-books do you have to sell before you make money, and I don't know that exact number offhand, but we're not talking about very many. We're talking about certainly fewer than 100, and that's why we see a lot of the publishers just rushing into this market.

The thing that was constraining the development was the devices. With E In now we're seeing that that's largely been obviated and people are embracing the devices and the market's going to be there.

Great. I'm done. Thank you.

Thank you. (Operator Instructions). And our next question comes from Ephraim Fields of Clarus. Please proceed with your question.

Good morning. I was just trying to understand the impact of the FX hedges, as well as the cost savings and just looking at things on a normalized pretax profit basis and maybe I could walk you through my math and you tell me where I'm going wrong. If this quarter your pretax was $1.6 million, you said you were hurt by about $300,000 this quarter of FX hedges.

No, Ephraim, actually, we were hurt by about $750,000 and next quarter, meaning Q4, we would expect to be hurt by about $300,000 remaining as those forward contracts roll off.

Okay. And then once that falls off, kind of on a normalized scenario, you'll be picking up a $300,000 net benefit, is that correct?

No. The whole thing rolls off, so if you were to compare Q3 to let's just say a Q1 where the currencies stay where they are today, I would be expecting a $750,000 benefit, offset by the costs of whatever new hedging program we put in place if indeed there were costs associated with that, and we're expecting that there will be, because we look to use some things other than forward contracts.

We're projecting that offset cost to be about $250,000 to $300,000.

So you were hurt this quarter by about $750,000 and if you didn't have those hedges and the dollar had been where it is today, you would be benefiting by, let's call it $300,000 ballpark, is that right? Just trying to look at what you'd look like under a normalized scenario with the new hedging in place.

Yes, I guess $750,000 offset by $250,000 to $300,000 reduction.

Okay, so there's like a $500,000 net swing when I add back the losses you incurred this quarter and also give you credit for the gains you should be getting under the normalized scenario with the stronger dollar.

Yes, I think that's right.

Okay, and then you should be benefiting by about $650,000 per quarter as a result of these cost savings?

That's correct.

Okay, so if I take 1.6 and 0.7 and 0.6 -- okay. And all those assume, when I add back those two items, that doesn't give you any credit for any revenue growth or price improvement. That's not considered in your cost savings. Is that correct?

That's exactly right. So if you figure, we've obtained price increases, we've done some production reengineering that will accrue benefits of several hundred thousand dollars probably would be a ballpark on that. And then in terms of revenue growth, if you assume a 40% to 50% flow through, that's what you'd see.

So my normalized, if I just take your (inaudible) and add back the $700,000 revenue FX impact that we discussed and the $650,000 cost savings, that gets m to ballpark $2.9 million of pretax profit versus the $1.6 million they had this quarter.

I think that's right, and then just don't forget, if you're looking at a normalized quarter to back out a projected cost of a new hedging program, which we said was like $250,000 to $300,000, and then we also said several hundred thousand of reengineering and pricing.

Yes, think the second part, the one-time, would be more of a one-time in nature, the restructuring charge. Thank you very much.

No, I wasn't referring to restructuring charge. I'm saying, on top of the 650 we would see additional benefit coming from price increases at production reengineering.

Oh, I'm sorry, I misunderstood you. Okay, thank you.

Thank you. And our next question comes from [Joe Furst] of [Furst Associates]. Please proceed with your question.

Good morning, gentlemen, congratulations on a very good quarter and you're making great progress. I missed the very first part of the call because evidently somebody put me in the wrong conference call. If you've said it before, sorry to repeat the question, but what effect have you seen from the weakening economy, a positive effect or a negative effect, or how has it affected you in one way or the other and how do you anticipate it might affect you?

Yes, we saw an effect this quarter, when a project that we expected could be about $750,000 to $1 million in revenue didn't materialize. It was one of the -- it was going to be with a new pass-through client that was the subject of one of the big Federal Reserve bailout things going on. So that was a negative effect. If you want to see a normalized exchange rate as a byproduct of what's going on in the markets, then you could see that as an offset.

By and large, what we're seeing though is that we are not affected the way a lot of BPO companies are affected. If you think about all the call center companies that are serving the retail sector and all of the Indian BPO companies that are serving the financial services sector, that's not our client base. So we're not seeing issues relative to that.

We believe that in this market, generally, companies are going to be looking for ways to do more with less, and that's what we do. We help them do more with less, so we think there will be benefits from that perspective.

Okay, thank you.

Thank you.

Thank you. (Operator Instructions). Thank you. At this time, there are no further questions. I would now like to conclude the question and answer session and turn the call back over to Mr. Jack Abuhoff.

Well, again, thank you, everybody, for joining the call. Thanks for your questions, as well. To quickly recap our discussion in Q4, we believe that revenues could be as much as 20 million or more, helping us achieve the second consecutive career of record revenue. What's more, we're confident that we will be able to continue our rapid revenue growth into 2009 and deliver another record year and improve our bottom line substantially at the same time. Taking into account the uncertainty of the current economic environment and the potential for prolonged economic contraction, we're also very focused on cost management.

In terms of cost control, we've identified approximately $650,000 per quarter, or $2.6 million a year, of operating margin improvements on the existing level of business and we think we can implement those within the next several months. One-time costs to obtain this benefit would probably be approximately $600,000 to $700,000. In addition, we see benefits coming from price increases and from reengineering efforts.

So, all in all, we're very energized by the prospect of going into 2009 with increasing revenues from our most significant clients, a robust pipeline of new opportunities, with both new and existing clients and the prospects of a lower cost structure, not to mention a foreign currency strategy that's going to help us capture and preserve the benefits from a stronger dollar.

So I very much appreciate your continued support and interest and we look forward to being with you next time. Thanks again.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.