Startek Inc (SRT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the StarTek Second Quarter 2007 Earnings Conference Call. My name is Onika, and I'll be your operator for today. (OPERATOR INSTRUCTIONS)

At this time, I would now like to turn the call over to Ms. Mary Beth Loesch. Please proceed, ma'am.

Good afternoon. I'm joined on the call today by StarTek's President and Chief Executive Officer, Larry Jones. We're also joined by Pat Hayes, our Chief Operating Officer; and Sylvia Church, our Controller.

Larry will be delivering our prepared remarks today, with some brief comments about our release this afternoon. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. This call will conclude no later than 7 p.m. Eastern Time.

As always, for those who have not yet received a copy of our press release from today, please go to our website, www.startech.com, where you can download a copy from the Investor Relations section.

And of course, please note that the discussion today may contain certain statements which are forward-looking in nature pursuant to the Safe Harbor provisions of the Federal Securities laws. These statements are subject to various risks and uncertainties, and actual results may vary materially from these projections. StarTek advises all those listening to this call to review our 2006 Form 10-K posted on our website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections.

Further, our discussion today includes some non-GAAP measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP-basis measurement and have included these reconciliations in our press release and on our website.

Now I'll turn the call over to Larry Jones, StarTek's President and CEO.

Thank you, [Mary Beth]. Good afternoon, everyone. And thank you for joining us. Let me first start with some general comments, and then review the financial results for the second quarter. Then I'll discuss the operating highlights of the quarter.

The Company continues to be focused on growing revenues and restoring profitability in 2007, while preparing the Company for significant expansion in 2008. This quarter, we made significant progress on these goals, as we grew revenue 2.1% over Q1, saw increased sales momentum, increased gross margins net of FX, continued to strengthen the management team, announced the opening of a new site in Texas, and eliminated a nonperforming site in Hawkesbury. In addition, in an effort to clean up our balance sheet, we booked several noncash writeoffs in the quarter.

These accomplishments highlight the progress we've made on many initiatives, outlined in January, to restore profitability and growth. I'm very pleased with the Q2 results and truly believe that the trends will continue in the second half of the year, positioning StarTek for healthy growth and profitability in 2008.

Now let me first discuss the financial results for the second quarter 2007. In Q2, we turned a corner on revenue growth for the first time in three quarters. Revenue for the quarter was $58.8 million, up 2.1% from the prior quarter; and down slightly, 1.2%, versus the same period last year. The increased revenue versus the prior quarter was driven primarily by increased business from current clients and improved pricing terms negotiated with two significant clients, offset by lower revenues from the temporary closing of the Petersburg facility.

Recognizing that many of you track our client concentration, AT&T percent of revenue for the quarter was relatively flat with Q1, at 52%. T-Mobile, our second-largest client, accounted for nearly 21% of our Q2 revenues, up 1% from Q1. I would also remind you that while these clients represent a significant percentage of our overall revenues, each of these accounts have numerous programs, serving multiple lines of business with multiple service types.

Gross margins for the second quarter were 14.5%, compared to 15.5% in Q1. After normalizing for $776,000 of foreign currency exchange impact, gross margins actually improved, from 15.5% in Q1 to 15.9% in Q2. The margin improvement was due to improved pricing, mentioned earlier; productivity gains in some of our centers, and customer mix.

The FX impact of $776,000 in the second quarter versus the first quarter was a result of the decline in the exchange rate for the Canadian dollar, from an average effective rate of $1.17 in Q1 to $1.12 in Q2, net of our hedges. While this rate variance impacts positively our revenues received from our Canadian clients, it is more than offset by the expenses incurred in our seven operating centers in Canada that serve both Canadian and U.S. clients.

We highlight this issue and show adjusted margins, not to minimize the absolute impact of the Canadian currency on our profitability, but rather to point out our real gains we've made this quarter in improving our margins. We continue to see declining rates and expect it to negatively impact our margins in the third quarter, despite our use of hedging strategies that reduce our risk of large swings in currency rates.

SG&A in the second quarter decreased to $9.0 million, from $9.4 million in the first quarter. When adjusted for the one-time severance expense of $779,000 in Q1 and the FX in Q2, second quarter SG&A actually increased by $369,000, or about 4%, over Q1. This increase was driven by our investments in corporate staffing and human resource programs.

As a result of these items, we reported an operating loss of $0.5 million. When normalized for the severance charge in Q1 and the FX impact, Q1 versus Q2, operating income improved slightly, from a positive $0.3 million in Q1 to $0.33 million in Q2. I encourage you to refer to the Reg G disclosure and the press release, or our website, for a detailed reconciliation of all of the adjusted figures.

Even though our operating losses were similar to last quarter, the net loss and net loss per diluted share for the second quarter were $3.6 million and $0.23 a share. This compares to a Q1 net loss of $0.2 million and $0.01 a share.

These second quarter losses include three noncash charges booked in the quarter. First, we took a $1.7 million impairment charge related to HR and CRM software projects that were on our balance sheet, and work in progress that we deemed no longer viable. Secondly, we booked a $1.3 million impairment charge for the leasehold improvements associated with the closure of our Hawkesbury center. Both of these noncash items are reported as impairment of assets on the other income line.

Finally, we took a $1.8 million tax valuation alliance for capital tax-loss carryforwards that management does not believe will be offset by future capital gains prior to their expiration. As a result of these two impairments, the tax valuation allowance and an offsetting $0.3 million in work-opportunity credits booked in the second quarter, our year-to-date tax rate was 1.1%. A full reconciliation of this tax rate versus 2006 will be available in our 10-Q filing.

Our cash and investments over the quarter improved $8.3 million, to $43.7 million total. This increase was mainly driven by lower accounts receivable. Our long-term debt is just under $14 million, down from $16 million at the end of 2006.

Now let me put back my CEO hat on and talk about the industry, key accomplishments in the quarter, and our plans for Q3.

I'd like to take a few moments first to comment on industry trends. You may recall that we compete with many of the traditional BPO players by providing high-value outsourced customer service, focused solely on the communication sector. That is, wireless, wireline, cable, satellite and media companies.

Recently in this sector, we have seen a growing demand in customer support, due to strong subscriber growth, a rapid introduction of new and complex products and a focus on customer satisfaction driven by hyper-competition among the communication providers. Many companies are also reducing the number of outsource partners.

This increase in demand, and a flight to quality, has proven beneficial to StarTek, with our reputation for quality and industry expertise. We are seeing more demand from our existing clients and more opportunities to displace existing vendors that are not performing.

We're also seeing an increased demand in the B-to-B, and particularly SMB -- small and medium business -- sectors, as many communication companies race to introduce new products based on new technologies, such as wireless data, Voice over IP and integrated voice data in cable. StarTek has over a third of its revenues today in this high-margin B-to-B sector. And we believe that we are well positioned to help these companies as they bring these products to market.

These industry trends are fueling our new sales efforts. The efforts have been focused on securing new revenue from both new and existing clients. By far, our strongest demand for new seats has been from our existing base of clients like T-Mobile, Comcast and AT&T. During the quarter, we grew our revenues in all of these clients, meeting increased demand, and by adding new programs, new lines of business and additional services.

Petersburg, previously closed in February, has been training agents throughout the quarter for an existing client. We went live this week and will be at 50% capacity next month, and have client demand to continue to grow through year end.

In addition, we secured one new client in the second quarter, and two more recently in July, and have a solid pipeline of new deals we're pursing. Most of these opportunities represent smaller, but higher-growth, opportunities. All of these factors -- existing client growth, new sales, new sites -- should result in continued revenue growth in the next several quarters, as these programs ramp.

Now let me update you on the status of several key client contracts. We continue to work on reviewing and/or negotiating our existing client contracts. In the first half, we successfully negotiated pricing terms with two of our larger clients, which had a positive impact on our margins this quarter. While I believe that we have now addressed all of our client issues, we will continue to look for opportunities where appropriate to improve pricing terms that improve margins and reduce risk.

We also have two contracts that are on extensions for renewals. We signed another extension for the Cingular contract that had expired in January. We have now extended this contract through September 30th, allowing AT&T time to finalize the corporate-level approvals. We also recently signed an extension to the T-Mobile contract, which expired August 1st, through September 1st, giving both parties time to finalize terms of the agreements. In both cases, the negotiations are friendly, and relatively consistent with prior contract terms.

In the first quarter, we announced we added several new executives to provide a platform for growth. In the second quarter, we continued to fill in key management positions in operations and HR, specifically focused on developing strategies around recruitment, training and retention.

We are still actively recruiting a CFO. And while I'm disappointed that we have not yet secured one, I am confident that we'll find a qualified candidate in the near future. In the meantime, our existing financial team is strong. And I believe that we must be methodical and patient in order to find the right individual.

A piece of our operational improvement plan is our site-optimization efforts. This effort is focused on ensuring that every site has outstanding site management, is located in a good labor market, and is capable of growing FTE to fully utilize and leverage our fixed-site expense. As part of this effort, we have ranked all of our sites and developed specific plans to ensure that every site operates at the full capacity.

To date, we have upgraded a number of our site directors and expanded our overall site-management teams. In addition, we've implemented a number of new HR recruiting, training and retention programs, focused on increasing our applicant flow and reducing attrition, to meet the growing demands of agents.

As part of this site ranking, we determined that we were consistently unable to hire agents in Hawkesbury, Ontario because of the limited talent pool in the community. In July, we announced plans to close the center in August. All of the contact agents located in Hawkesbury will be offered an opportunity to apply for positions in our nearby Cornwall, Ontario facility. To be clearer, we are pulling out of a community, not the Canadian market. As a result of this closure, we estimate that in Q3, we will recognize up to $1.1 million of expenses associated with terminating the real estate lease, which is still under negotiation; and up to another $900,000 of other shutdown-related expenses. In addition, we're looking to open in new sites to meet future demand. On July 3rd, we announced plans to open a new contact center in Victoria, Texas. On July 18, we signed a multi-year lease for a facility in Victoria. The facility will have a 600-seat capacity and utilize a new quad layout with variable launch [quaffs], and a new centralized VoIP communication architecture that will help us scale more quickly to accommodate our growth plans.

All of these efforts I've discussed so far -- namely growing our revenues, strengthening our team, negotiating contracts, closing and opening sites, recruiting, training and retention programs, and the writeoffs -- all have a direct effect on our efforts to return to historical profitability levels in 2008. I feel confident that the revenue and margin trends reported this quarter are indicative of the improved growth and profitability to come.

As for guidance, we continue to be reluctant to give specific guidance for 2007, given the level of change we are driving in the business. Throughout today's call, though, you should have heard that we expect continued improvement in revenue, in gross margins; throughout the second half of the year, offset by a continued drag from declining Canadian FX rates and a third quarter one-time expense of up to $2 million related to the shutdown of Hawkesbury.

In closing, while our second quarter numbers are muddied by writeoffs and the impact of the Canadian dollar, I am very pleased with our progress. These programs that we initiated in the first quarter are starting to produce results. And I believe that we'll see continued progress in the second half on our road to growth and profitability.

Thank you very much. And with that, I'd like to open the line for questions.

(OPERATOR INSTRUCTIONS) Tobey Sommer with SunTrust Robinson Humphrey.

Thank you.

I joined the call once you'd already started, so I apologize if you touched on this. Could you update us on the status of the T-Mobile contract negotiations? Thank you.

Yes. We have an extension signed through September 1st, and we're working diligently between now and then to re-sign the agreement.

Okay.

And I wanted to ask a question about the new sales kind of pipeline that you discussed. One is, primarily again, communications-related companies. And because I think you said they were perhaps smaller, and maybe potentially faster-growing, I was wondering if the sales cycle for those prospective clients may be shorter than some of the larger contracts that you've tried to sort through recently. Thanks.

That's a great question.

I think in general, what we're seeing is less and less big mega-contracts, and more and more contracts that are either add-ons to our existing base or smaller clients who are entering the marketplace, or just beginning to outsource and to grow. We're also seeing different lines of business -- smaller lines of business within the big communications companies starting to come, particularly in the more complex B-to-B side -- open up opportunities for us.

Are the sales cycles shorter? Probably a little bit. But we still -- takes three to six months to work them to close. Some of the more medium-sized contracts could take longer.

As far as pursing communication sector -- yes, we are focused solely on communication sector. Once in awhile, we get an opportunity that's outside of that that we jump on. But all of our marketing efforts, all of our sales efforts, are focused on the communication sectors.

Thank you.

I understand some of the actions that you've taken -- or will be taking here in the third quarter -- to improve your gross margin, and maybe reduce attrition, et cetera, by closing the center in Canada. Looking forward to 2008 in the opportunity for better gross margin, I was wondering if you could break it down for me, in terms of whether you see pricing as a contributor, or is it better utilization of existing centers -- just kind of the two or three top contributors to what could be better gross margins in the future.

Yes, I think the low-hanging fruit in 2007 was focused on existing contract pricing and focused on quick turnarounds in some of our sites. I think as we look into 2008 -- one, we believe that the volume will increase, which gives us more utilization, filling up sites better, in that sense; and on probably higher growth in some of our higher-margin clients. But a lot of the margin improvement in 2008 will be directly attributable to a higher volume of revenues.

Okay, so primarily, you're talking about G&A leverage, so kind of operating margin leverage, not necessarily gross margin leverage?

You get some gross margin leverage through volume, because you fill up your sites. And you've got -- you still have variable cost in gross margin as well.

Okay. And I'll ask one more question; I'll get back in the queue.

You've had some additions to your management team, other than for the pending CFO hire. Are you happy with the new people you've brought onboard, and think that you've got the team that you'll need for awhile? Are there still some open positions that are meaningful that you're looking to fill?

Other than the CFO, the executive team is in place and awesome, and really starting to gel and perform. The next level down, we added three or -- I guess, about three or four new positions in the last four months. Those are in place in HR operations. So we're very pleased with that. There are no significant open slots that we're going out to fill.

[Thank you] --

So the SG&A should settle down after the CFO's in place, as we go forward.

Thank you very much.

Arnie Ursaner with CJS Securities.

Hi, good afternoon. You mentioned in your prepared remarks that you improved your pricing terms with two significant clients. Can you give us a feel for when in the quarter that occurred, and whether the quarter got the full benefit from this? And if not, what might be the impact in the current quarter?

In both cases, it was the full quarter.

Okay. And can you give us a feel for the type of negotiation process -- what is it you're offering them? And what are they asking for in return, if you will?

Wow, that's tough. Because they're different in different cases.

I think, in a nutshell, where we have contracts that don't work for us, we sit down at the table and try to renegotiate something that works for both of us. Our argument is that at some pricing, we can't deliver the volume, and that it's not healthy for either side for us to not be able to deliver the FTEs that they're requiring.

In some cases, it's not just a price increase, or -- it's not a price increase; it's also a risk-mitigation strategy, changing contract from price-per-call to price-per-hour, to some other kinds of parameters in the contract that help us better utilize the FTEs that we have; better utilize the fixed side of the cost. So it's not just straight sitting down, arm-wrestling at the table to be able to get better pricing.

Okay.

And you mentioned the process under which you announced the closing of the Hawkesbury, Ontario center. Do you have other facilities that have similar characteristics, that perhaps at a later date you would take a similar approach to?

As I said in my remarks, we've ranked them all. We've got plans for all of them. At this point, there are no sites that are earmarked to close. But over time, depending on the labor market and on the situation, and the client mix in the site, we could reevaluate. But I wouldn't be looking for anything serious to happen, clearly in one quarter, and probably in two quarters. And then it's really up to an ongoing review process.

Okay.

Final question from me -- Comcast has not approached being a disclosable client yet?

I don't believe so, no.

Okay. Thank you very much.

Josh Vogel with Sidoti & Company.

Hey, Larry, how are you?

Great, Josh, how are you?

Good, thank you.

First, with the improved pricing terms with two of your clients, I was just curious -- what levers did you have to pull to improve these pricing terms?

That sounds like the same question as last time.

Basically, I think the contracts that we're talking about were historical. And while they weren't up for renewal, it was very clear to the both sides that the arrangement was not working. And therefore, a lot of what we leveraged was our goodwill relationship with the client and our continued delivery of quality service to the client.

And through those two, and -- I think if you heard my general comments in the industry, we've got great relationships with all of our clients. And we've got a reputation for quality. So when we go back and say -- in order to continue delivery of this kind of quality, we need x -- we may not get x, but at least we've got some leverage.

Not a pretty process, by any stretch. But we work it, and we're successful.

Okay, good.

And then, you mentioned adding new programs with several existing clients. And I was just curious if you're adding any new programs with Cingular or T-Mobile.

Yes, and Comcast as well. So we are constantly working. In fact, half of our sales force works with the operating team to go in to leverage our success in the various lines of business, to extend it into other lines of business.

And if I were to say, the area that we're having the most success, the fastest growth opportunities are in that area.

Okay.

And then, just looking at Cingular, how confident are you that you think you can get a long-term contract inked with them, after the September extension expires?

High, high, high.

I'm sorry?

High level of confidence.

By the end of September?

Yes.

Okay.

And just lastly, did you lose any clients last quarter?

No.

Okay. Thank you.

Tom Carpenter with Hilliard Lyons.

Good afternoon, Larry.

How are you?

I'm well. And I'll refrain from asking that one question, but [just with] a different angle.

I'll give you the same answer.

I think you covered it.

[Okay.]

Hey, can you maybe compare and contrast the lines of business that you guys are doing at the existing facilities, versus maybe the business that you've recently won from Petersburg and the new Texas site?

There's no correlation. The sites that we're building in Victoria and in Petersburg are adoptable to almost any type of business. And -- I won't say any type of labor pool, high or low. But what we do is really more work with the client than try to determine -- given our capacity, are they -- do they like the site, do they like the site management, do they like the labor pool, will this program fit in there. But there is no -- yes, we're not building one for tech support versus complex, versus basic support. The centers are capable of doing all kinds of things.

Okay, so --

In the case of Petersburg, it was one client focused on one kind of business. But it could have been at another client with another kind of business, and it wouldn't have made a difference.

I guess, what I was trying to ask is, in the past, a lot of it was on the telco side, maybe for general billing questions. A lot of it, a couple years ago, was for activation issues. Is it still mainly in-base calling at the new centers? Or is it both in-base and outbound calling?

So take the word "center" out of there. All of our centers do all kinds of work, and they've been able to move from one kind of work to the other. So it's not really center-based. But if you're asking what does our business mix look like, and what are we seeing more of mix in -- as I said, we do about -- little over a third of the higher-end business consumer -- I mean, commercial lines of business. And I would say we're seeing a little more of that coming in than not.

But we're getting our share of activations; we're getting our share of customer support. So I wouldn't tend to see our mix change too much. But we like the higher-end B-to-B complex stuff.

Okay.

Then, in the second quarter -- I'm sorry, the third quarter -- the roughly $2 million of expenses -- and just because you used the word "expenses," I'm going to -- those are cash charges?

Yes.

Okay.

And I said up 2 -- obviously we're negotiating on the site. [There's] the opportunity to sublease. There's all kinds of things we're working through --

Sure.

-- with that. So that would be the maximum.

And then on the direct expenses, that ranges from telco disconnects to costs, to shutdown the operation. And that again is up 2 as well.

Okay.

So we're working hard to make that, but it's all cash.

Got it.

Next year -- I think in your prepared remarks, you talked about you're laying the groundwork for significant growth next year. As you guys are starting to plan for '08, would you like to fund this growth internally, or do you see some opportunities to leverage the balance sheet?

I think from a growth perspective, we got plenty of cash to grow the business and have no interest in leveraging the balance sheet. When we start doing acquisitions, there would be an opportunity, even though our -- yes, it could come in many different forms.

Okay. So new business, kind of a pay-as-you-go.

Correct.

Okay. Thank you.

Right.

Mike Fitz with SunTrust.

Thanks, just a couple quick questions.

Just looking at revenue for -- looking at the third quarter, looks like second quarter revenue dipped down on a year-over-year basis. Just wondering, given the Petersburg facility ramping back up -- and what looks -- better price -- do you expect to return to year-over-year growth, or just sequential growth at this point?

Tricky question, [guys].

I guess at this point, I can't say. Because I would pretty much give you a growth rate. I think we're pretty confident that we can grow quarter-over-quarter. And we got a lot of momentum there. But I can't comment whether we're going to go over the $61 million, which is, I think, what you're trying to determine.

Okay.

And then, just a question on your hedging strategy -- are you comfortable with that strategy currently? Or are there any plans to kind of take a look at it and see if it [would] be possible to reduce that volatility in gross margin?

No, I think we basically collar the risk, and eat the risk in the middle zone. And we don't think we'd want to change those strategies. We work hard with our banking partners. And, yes, the strategy's pretty well locked in.

Thank you very much.

Thank you.

Adam Waldo with Silver Oak Services Partners.

Good afternoon, Larry.

How are you?

Thanks.

I want to drill down on something you said with regard to the issues around hiring a new CFO. And just wondered if you could give us a little more specificity around sort of what issues have arisen in the recruitment process -- particular candidates' concerns, and so on, about joining.

The concerns have been more on our end than the other end.

Okay.

We have lost two candidates, more to a competitive -- as you probably know, it's a pretty competitive CFO market out there. But we've been pretty picky about the candidates that we've extended offers to. So I think it's more about the hot market than it is about the opportunity here.

We think we've got a very attractive position, but we also want to make sure -- somebody who can scale with the business, who's compatible with the team, and wants to take a ride with the group to grow the Company.

Okay.

And then, as you were talking, in response to the prior questioners' queries about sort of leveraging the balance sheet for acquisitions -- given your sort of current and prospective margin structure in the near term, and your current excess cash position -- you're in a position to acquire other companies, to an extent that you might increase the Company's revenue base by 15 to 25%, depending on what you buy -- absent the ability to use balance sheet leverage or issues, or the desired issue stock. Is that a fair way for us to think about the potential magnitude of acquisitions you might consider over the near term?

I think the first strategy is to make sure that we have a company that's capable of doing acquisitions and mitigating the risk of doing acquisitions and integrating them successfully. So I don't believe that we're in that position yet, without a CFO. And therefore, we would look at acquisitions, but I wouldn't say we would be aggressively pursuing acquisitions in the next quarter.

When we are in a position to look at acquisitions and integrate them successfully, we would be looking at smaller deals that we could leverage our cash on our balance sheet, and not necessarily need to go raise debt to pay for the acquisition, which would imply a smaller type of revenue base or EBITDA base.

Third is -- that would be my preference, is to do something smaller -- third is, by time our margins return, and our cash flow returns, and we have a lot more debt capacity, based on our cash flow, then I think we could look at more sizable acquisitions in '08 that we could leverage up the balance sheet to do those kind of acquisitions.

In all cases, the companies would have to make strategic sense, they would have to be integratable, without a high degree of risk; and they would have to be on strategy, which means they would have to be in our core business, and not take us too far afield from what we're doing today.

Okay.

Then my final question is -- you alluded, in your prepared remarks, to achieving sort of historic levels of profitability. And I assume that to mean sort of that the historic margin structures that accompany kind of gross margins in the high teens to low 20s, and EBITDA margins in the 8 to 10% range -- is that a fair inference to draw? And if it is, what sort of time period are you targeting for that level of improvement, and how do we get there?

Without getting too close to guidance, I think your gross margins are in the range that we expect. Obviously, foreign exchange has a significant impact on that. So, wish I had a crystal ball to be able to -- but we had a point and a half swing this quarter, due to FX. So we got to be a little careful about projecting that level, given the Canadian concentration we have. But I think those are reasonable numbers.

And I think Q3 and Q4 are going to be recovery periods. And we'd like to exit and/or enter '08, and look at '08 as the kind of stabilization of those margin numbers. I think your EBITDA numbers are off -- are a little low, given where we're at today and where the depreciation level's at. If you do the first, I think you'll get higher EBITDA margins than you talked about.

Okay. And how do we get there? How do we get from here to there?

Let's see -- you grow the revenue base. You get all your sites performing. You make sure you stabilize your contracts and/or negotiate new contracts that have good margin structures to them. You do some acquisitions to help scale up the Company. And that's how you get there. And I think --

Thanks very much.

-- it's all short-term -- the short-term things are all in place that I talked about on my script. And I think those will drive the margins up, as we scale the Company into the fourth quarter and first quarter next year.

Thank you.

Donna Jaegers with Janco Partners.

Hello. Sounds like you've been busy this last quarter.

Yes, a little bit.

On Comcast -- obviously, their call centers -- I've heard lots of anecdotal evidence that their call centers are swamped. I'm just curious -- it would seem like there's probably a short-term opportunity to pick up some more business there. But how do you make sure that you don't get whipsawed by them pulling it back in-house?

I guess, I'm already out on a limb on Comcast, just by acknowledging. So I can't give any more details. But let me come up to a level of industry discussion.

And I think -- in all cases, with our clients, we have a very strong partnership. And I think it's not in the interest in partnership where people whip us around. I think if I looked at our Cingular or T-Mobile and other relationships, we have a very good understanding of ebbs and flows. And coupled with the fact that it takes six weeks to train reps in our sites for typical business, it's not as big a whipsaw as you would think. Because once you get these reps trained, then obviously they're moving volume around.

Now, any client would move volume around between vendors, between their in-house. And fortunately, we've been on the upside of that, as the business has grown.

The other side is a third of our business is B-to-B, which is a lot more sticky -- and some cases, sole provider, in which case you don't end up with that kind of situation. So the more business side we can acquire or win, then the less of that you actually see.

And then, just one quick follow-up -- on ramp costs in general, for hopefully the new contracts that you're going to be winning -- do you have a philosophy of whether to try to get the customer to pay for those ramp costs, or just eat it yourself and accrue it over the life of the contract, and get higher rates that way? What's your bias?

Obviously, bias is to get it up front. We've been quite successful in renegotiating contracts and in negotiating new contracts to get that as a condition -- not always absolute; it's not always 100%. But clearly, both -- what we saw a year ago in this Company, which was high -- no reimbursement of those costs -- really dings the gross margin pretty hard while you're ramping up.

So given we are going to be ramping and continue to ramp for years to come, our real goal is to try to bake that into the price of the contract, and do it that way, rather than fund it up front.

[Okay, thanks] --

Site costs will be funded, and capital, and so forth. But training costs and those kind of ramp costs, hopefully, we can share with the client.

Great. Thanks.

Melissa Moran with Thomas Weisel Partners.

Hi. Good afternoon.

How are you?

Good, good.

So actually just a question on ramp costs and timing for the Victoria center. Do you have a sense for when you're going to begin to incur training costs for Victoria, and how long you anticipate that that would be a drag on margins?

Hopefully it won't be that big a drain on margins, because again of this conversation we just had before, where new clients we're bringing on, or new programs we're bringing on as a shared-cost component.

Secondly, we have some business secured to that site, but we don't have full capacity secured. So it'll really depend on how quickly we can secure that when we start training. So probably minimal training in Q3; more training in Q4 is the way I would look at -- even though it's -- right now, it's still pretty mushy.

Okay. Great.

And then, in terms of attrition, could you talk about your efforts to reduce attrition, and how that trended relative to the levels it was at in 1Q?

We don't give absolute attrition numbers, but I can tell you that it's seasonal. So if we compare it to a year ago, it improved slightly. But in general, our attrition rates are still not where we want them to be. And if we look at six months of effort -- again, it's a seasonality thing -- that they've improved slightly.

The efforts that are in place are around three key components. One is making sure that we focus on the recruiting process, the screening process; and getting qualified candidates in that don't [atrit], which has been one of our historical problems. So we're doing a whole series of programs around recruiting, increasing the number of recruiters, putting better system screening in place.

Second is the training process -- making sure we focus on training, and make sure -- stopping the bleeding of agents who are in training, who get halfway through training and realize this is not what they want to do for a living. Or the training isn't of qualities [or] focused on training. And then third is focusing on the culture and career-pathing of the individuals in the -- who get through production and are on the floor. That has to do with site managers, it has to do with the culture of the centers, and a lot of other programs that our HR is putting in place to try to focus on retention in the centers.

All of those take time -- probably a three- or four-quarter initiative before you see major results. But they're all in progress. And hoping to see them show fruits over quarter-over-quarter.

Okay. Great.

And one last question -- could you give a sense for what a normalized tax rate would be going forward?

Wish we did.

First of all, you're now two quarters into the year. So when you add another quarter, everybody's going to look back at the whole year and kind of readjust it. So yes, it's going to take a couple quarters to get back to the standard tax rate that we've -- historical tax rate, which I would say is 37.5 -- is that what it was? Yes. So if you think about -- if everything was clean, that's what it would be operating at.

But I think, given all the noise in the tax line last quarter and this quarter, it's really hard to predict what it's going to be going forward, until we get our tax partners in here to re-crank the numbers.

Okay, great. Thank you.

Sorry, I know that doesn't help, but --

[Jason Schetch] with [Hartmann Advisors].

Hey, Larry.

As I look out to '08 and beyond, I guess, with the Virginia facility reopened and the new facility in Victoria, Texas -- what type of revenue level do you think you can support from just your current facilities, before you would need to open another new facility?

I think we need to open a new facility fairly quickly. We have a -- we have some capacity in our centers. I would not say we have an excessive amount. Some of the new programs that we are working on would require us to open a new center as soon as first quarter of next year. So it will be driven by demand, obviously.

But I wouldn't think that we're sitting on 50% excess capacity. We have, again, some capacity in our centers. But I think if we continue to push the growth rates where we think we can, we'll be constantly opening centers ahead of demand curve.

Okay.

And to follow on the last caller's line of questions -- can you comment at all on the trends in involuntary turnover that you saw maybe in July, versus where they were in June and May?

So in the last --

[Has it] improved, or --

In the last three or four months?

Yes.

Yes, I mean, unfortunately it's not that easy a number to talk about. Because first of all, the seasonality -- as people go into the summer jobs, and then come out of the summer jobs; or as -- the workflow moves around on a seasonal basis. I think I'll answer it the same way I answered before, which is that we see slight improvements across the board, because it's also not normalized center-to-center. But I do see slight improvements, and continued improvements. And the best is yet to come with some of the programs that are going to take a little longer term.

So yes, I see improvements. And if I were -- again, unfortunately, there's too much noise in the number to be able to tell you that June, July, August was up 1, 2, 3% or something.

Sure.

Okay, thank you.

Tobey Sommer with SunTrust Robinson Humphrey.

Thanks. My question's been answered.

Great.

Donna Jaegers with Janco Partners.

Hey, Larry, just to follow-up on [Agent at Home] -- I know you guys had looked at it some time in the past. Now you got a new CTO onboard. What's your feeling as far as moving to that, rather than continuing to have to open new centers?

For a lot of our clients -- I think as you and I have talked before -- it's not a viable option because of the security concerns. For certain types of work, it is an option. We are dabbling with it on a small scale. But we don't see it as a major strategic shift, which would change the margins or change the economic structure of the business. We see it more as a tool for certain focused kinds of programs.

We may change that, and we -- after we experiment with it a little bit. Clearly, we have the technology; we have the ability to do all of it. But it'll be driven more by client demand than anything else.

Okay. Thanks.

(OPERATOR INSTRUCTIONS)

At this time, there are no additional questions in queue. I would now like to turn the call back over to Mr. Larry Jones for closing remarks.

Why, thank you, everyone. Very insightful questions. And we look forward to giving you an update next quarter on what's going on with the business.

Thanks for your time.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a good day.