Startek Inc (SRT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 StarTek earnings conference call. My name is Antoine and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr. Dave Durham, Chief Financial Officer. Please proceed, sir.

Thanks, Antoine. Good morning, everyone, and thanks for calling in. I'm Dave Durham, StarTek's Chief Financial Officer, and it's my pleasure to welcome everyone to StarTek's first quarter 2008 earnings call. I'm joined on the call today by StarTek's President and Chief Executive Officer, Larry Jones, and Chief Operating Officer, Pat Hayes.

Larry and I will be delivering our prepared remarks today with some brief comments about this morning's press release. At the conclusion of our prepared remarks, Larry, Pat and I will conduct a question-and-answer session.

For those of you who have not yet received a copy of today's earnings press release, please go to www.StarTek.com, where you can download a copy from the Investor Relations section of our website.

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 2007 Form 10K 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. These reconciliations can be found in a table at the end of this morning's release, as well as on the Investor's page of our website under Regulation G.

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

Thank you, Dave. Good morning, everyone, and thank you for joining us. Let me start with a recap of our key accomplishments for the quarter. The first quarter was a very busy quarter, with revenues up 12% over last year. The revenue growth was attributed to several factors.

Our largest client, AT&T, grew 5% over last year and 2% over the prior quarter. This is due primarily to increased demand from the client and the fact that we continued to be awarded new business based on our operational performance.

As for the status of the contract renewal for consumer wireless care, we continue to wait on executive level signoff mandated more than a year ago with the merger of AT&T and Cingular. We recently signed another contract extension, adding another 30 days to our existing contract. The client expectation is that we'll have our contract signed soon and renewed for a two-year term at pricing comparable to today's rates.

Our second largest client, T-Mobile, continues to grow nicely as well. This client grew 60% over last year and 15% over the prior quarter. This growth is again driven by strong client demand and our continued operational performance.

The planned growth in both of these clients was a major factor in our decision in late 2007 to add new sites which have ramped nicely over the past several months and should continue to do so throughout the rest of 2008.

During the quarter, we signed our first new-name contract for 2008, Aircell. Starting in Q3, we will be staffing a technical support team for Aircell, a company that provides airline passengers with in-flight, high-speed data connection called Gogo Inflight. Aircell has initiated service with one airline and has another one planned this summer, which is expected to drive our FTE growth for this client.

Additionally during the quarter, we were awarded two new programs for two existing accounts, both of which are expected to grow over time.

As announced last quarter, we continue to execute on our site expansion plans. We delivered our first call in Victoria, Texas, as planned in January. We received positive comments from our client on launch execution and exceeded their expectations during the launch phase.

In late March, we successfully delivered our first call in Mansfield, Ohio, for another large client and in April, we announced plans for a third site in Jonesboro, Arkansas, with the first call expected in August.

The Victoria site ramp allowed the Company to add FTE and revenue during the first quarter, but also put a drag on margins, which Dave will talk about more later.

Last quarter, we announced our StarTek at Home effort. I'm pleased to report that we currently have two customers with a small percentage of their business working from home with great success. These programs have demonstrated that remote agent quality and operational performance is as good, or better, than our in-center counterparts.

Over the past year, you've heard us talking about making investments in key management personnel. During the first quarter, we hired several director-level positions in IT, management development and an offshore team. These new positions are key to providing the expertise to continue to scale the business.

And finally during the quarter, we increased our marketing investments with messages intended to solidify our leadership position in wireless and telecommunications, and to better position ourselves in the cable industry.

We had our disappointments as well. First, we completed the wind-down of a client that notified us in December that they would shift the work to another vendor at a much lower price. The wind-down was completed in March and it's had a negative impact on our first quarter revenue and margins.

Our second disappointment was that our gross margins fell sequentially after making improvements in the last two quarters. While disappointment (sic), it was expected, given the continued impact of foreign exchange, the impact of ramping up two new sites and the loss of the profitable client.

All in all, it was a positive quarter, where we continued to deliver on our growth initiatives, including making the required investment in sites and talent to support our future growth.

Now, I'll turn it back to Dave Durham, our CFO, who will provide a more in-depth analysis of the financial performance for the quarter.

Thanks, Larry. Our financial results for the first quarter came in pretty much as we expected. Our top line grew nicely compared to the first quarter of '07, but as Larry mentioned, gross margins were a bit of a challenge due to the investments in new sites, the ramp-down of a lost client and a weaker U.S. to Canadian dollar exchange rate. As a result, we reported a small operating and net loss.

Moving onto the details, revenue for the first quarter totaled 64.7 million, an increase of 12.3% compared to the first quarter of 2007, and a sequential decrease of approximately 1.4% compared to last quarter. The growth compared to the first quarter of 2007 was due to an increase in full-time equivalent agent headcount, as well as better rates. The improved rates were the result of efforts throughout 2007 to improve certain contractual terms.

Compared to the fourth quarter of 2007, revenue declined by 900,000, a decrease of 1.4%. An increase of approximately 2.3 million associated with the new site ramp in Victoria was offset by a $2.2 million sequential revenue decline associated with the lost client that Larry mentioned earlier. We expect a continued, but lesser, drag in the second quarter of this year related to this lost client.

The remainder of the revenue decline was due to seasonal factors, namely retail demand in the fourth quarter that fell as expected in the first quarter of 2008.

Recognizing that many of you track our client concentration, first quarter revenue from our largest client, AT&T, represented 49% of our total compared to 53% in the first quarter of 2007. T-Mobile revenue increased to 28% for the current quarter, up from 20% in the first quarter of 2007. It's worth reminding that while these clients represent a significant percentage of our overall revenue, each of these accounts have numerous programs serving multiple lines of business within both accounts with multiple service types.

As we pointed out on last quarter's call, we had some headwinds this quarter with respect to gross profit. Compared to the first quarter of 2007, gross profit dollars increased by approximately 700,000 to 9.6 million, but as a percentage of revenue, decreased by 70 basis points to 14.8%. The weaker U.S. to Canadian dollar exchange rate accounted for the entire decline, decreasing net of hedges from 1.17 in the first quarter of 2007 to 1.0 in the current quarter.

Applying the first quarter of 2007 exchange rate to the current quarter, gross margins would have been 19.4%, a 390 basis point improvement compared to the prior-year quarter. Better pricing on contracts renegotiated throughout 2007 accounted for that improvement.

Perhaps the more relevant comparison, however, is the sequential gross margin decline, which compared to the 17.4% reported in Q4 fell 260 basis points. Foreign exchange accounted for roughly 140 basis points of the decline in the fourth quarter of 2007, a realized exchange rate was 1.05 net of hedges and while in the first quarter of 2008, the U.S. dollar actually strengthened a little bit against the Canadian dollar, our hedge positions worked against us slightly, yielding a realized exchange rate of 1.0.

Our investments in new sites and the client loss accounted for the remainder of the decline in gross profit as a percentage of revenue.

While we're disappointed in the margin decline, particularly after two quarters of sequential gains, we believe that we are making the right short-term investments to position the Company for improved sustainable margins over the long haul.

The gross profit decline was partially offset by a little bit better SG&A picture. SG&A totaled 10.1 million, an increase of 700,000 compared to the first quarter of 2007, but a sequential decrease of 800,000 compared to last quarter. Corporate staffing and human resources programs accounted for the increase compared to Q1 of '07, while expected reduction in consulting and legal expenses and a reduction in SG&A related depreciation expense attributed to the sequential decline.

The improvement in SG&A did not completely offset the gross margin decline, resulting in a current quarter operating loss of 600,000 compared to a loss of 500,000 in the first quarter of 2007 and income of 300,000 last quarter.

Our net loss for the quarter totaled 300,000 or $0.02 per diluted share compared to a $0.01 per share loss in the first quarter of '07 and $0.03 of earnings per share last quarter.

Moving onto the balance sheet, our balance sheet remains strong with cash and investments totaling 32 million as of quarter end. This balance represents a decrease of approximately 7 million compared to the cash and investments balance at the end of last year and is due to the timing of accounts receivable collections associated with a couple of large invoices.

It's worth noting that on April 1st, we received 8.3 million in receivable related cash that we had hoped to collect by the end of March.

Cap ex for the quarter totaled 3.9 million, which included costs associated with the buildout of our Mansfield, Ohio, contact center, and depreciation expense totaled 4.4 million.

With that, I will turn it back over to Larry.

Thanks, Dave. Let me now discuss some of our plans and expectations for the upcoming quarter and the remainder of 2008. First, client demand remains strong. Our focus on the communications sector is serving us well when other sectors are struggling in this economy. Most of our clients are expanding and given the ramp of our new sites in Victoria, Texas, Mansfield, Ohio, and soon to be Jonesboro, Arkansas, we expect to see continued top-line growth throughout the year.

In addition, our sales pipeline remains strong and during the past month, we've bid aggressively on several RFPs for sizeable contracts. While these contracts are slated for rollout in the second half of 2008, the securing of any one of them would contribute to our growth well into 2009.

We also continue to focus on evaluating and expanding our delivery platform. While many of our Canadian sites are challenged by wage inflation and currency fluctuations, our U.S. operation for the most part remain strong. We do continue however, to benchmark and evaluate every site against a wide range of criteria and will close any site that is no longer viable.

At the same time, we continue to evaluate new site locations and make investments in remote agents and offshore expansion.

Throughout 2008, we expect to continue to scale StarTek at home to offer our clients an alternative to North American center-based services. We expect that this offering will allow us to extend the labor footprint of our existing centers and to provide us access to a more flexible, scalable and high quality labor pool.

The most exciting news is the speed with which our Philippines expansion is proceeding. After our executive visits in February to India and the Philippines, we decided to Greenfield a site in Manila. We've engaged an in-country consultant partner and have organized a subsidiary that will take advantage of the Philippines's tax holiday.

An internal implementation team has been assembled and one of our existing operational VPs will be transferring to Manila in late May to become the Country Manager. A facilities lease is expected to be signed within weeks and site buildout activity should begin in May. We are targeting revenue generation from the Manila site in the fourth quarter from a mix of current and new clients. This expansion effort is critical to provide new and existing clients with a low-cost complement to our existing North American offerings.

Finally, we continue to pursue M&A opportunities as another avenue to scale the business. As mentioned before, our focus is on smaller opportunities that can accelerate or broaden of services and industry coverage.

So in summary, StarTek is growing and continues to invest where necessary to provide long-term sustainable revenue and profit growth. We plan to continue to leverage our industry leadership position and expand our delivery channels with a remote agent platform and a global footprint. All of these efforts should provide for long-term shareholder value growth.

Before we open up for questions, I'd like to turn it back over to Dave for a second to wrap up and provide brief commentary on our financial outlook for the second quarter and fiscal 2008.

Thanks, Larry. We continue to believe that the overall financial outlook for 2008 is bright. The demand environment remains strong, as does our reputation in the marketplace for delivering quality. As a result, we currently expect revenue to continue to grow at double-digit rates compared to 2007, as our new sites come on line, tempered somewhat in the second quarter by the remaining ramp-down of the lost client mentioned earlier.

We also currently expect gross margins to improve by year end, though in the short term, we expect our investments in new sites and the client loss to be a net drag on gross margins.

And finally, we expect SG&A expenses to increase slightly throughout the year, as we incur incremental costs associated with the new sites and as we invest in our Philippine expansion.

With that, Larry, Pat and I would now like to open up the line for questions. Antoine, can you see who's in the queue?

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed with your question.

Good morning, guys. This is Torin Eastburn filling in for Arnie Ursaner.

Good morning.

Good morning.

Hi, Torin.

Good morning. I have a few questions about your Philippines expansion and I didn't get to hear all the call, so I apologize if you've already answered these, but will this be your own plant or will it be a joint venture?

It's our own subsidiary and our own operation, which we'll lease the facility and have our own people there.

Okay. And do you know how many numbers of seats you expect there?

Typical centers over there -- we haven't signed a lease yet and when we do, we'll put out a more robust announcement on the operation, but typical centers over there are about twice the size they are here, so I think 1,000 seats.

Roughly 1,000. Okay. And would you see any expansion there in the future if that goes well?

I'm sorry, in the Philippines?

Future expansion beyond the initial site.

Oh, yes, absolutely. We would treat that as a country and just like we do here, we would open multiple sites based on client demand.

Okay. Thank you. I will hop back in the queue.

Thanks.

Your next question comes from the line of Melissa Moran with Thomas Weisel Partners. Please proceed with your question.

Hi, good morning.

Good morning, Melissa.

Good morning.

Good morning.

Thanks for giving us a quarter-over-quarter gross margin reconciliation. That was helpful. On T-Mobile, I noticed that it looks like your sequential revenue growth was a little bit above where it's been recently. Was there anything that stood out about that?

Well, we did announce -- Melissa, this is Pat. We did announce the opening of our Victoria center. We have announced other expansion that we've done and so, yes, we are meeting client demand.

And just specifically on the T-Mobile contract, was there anything unusual this quarter? It just looked like it grew a little bit more sequentially than it normally tends to.

No, we -- again, we're expanding with the clients' needs and we did take on a couple of new lines of business.

Okay, great. And then just on the gross margins, so I heard that you said that you expect gross margins to improve by year end. Did you mean by year end relative to the 2007 level, the 16%, or what was that compared to?

Really, we're talking about from the level reported this quarter, so in the short run as we suggested, the ramp of a new site, the expansion into the Philippines and the loss of the client is going be a short-term drag and we expect margins to steadily improve towards Q3 and Q4.

Okay. And then just finally on utilization, if you look at your utilization, how it trended quarter-over-quarter and exclude the facilities that are ramping, would you say that it was up, flat, down? How did it move versus 4Q?

It improved slightly on an incremental basis, but not a huge improvement. We did experience -- and part of the way that we measure that is by -- through the number of full-time equivalent agents and that number did increase pretty nicely compared to the first quarter of '07 and was actually down a little bit compared to the fourth quarter of '07. But as new sites come on line and continue to ramp nicely, we expect that trend to continue to improve.

Okay. And what are you seeing with attrition? Have you seen any improvement in that?

No, it's -- they're seasonal -- in fact, there's -- so we're seeing steadily, slow improvements there. We have long-term programs in place to address, but we're expecting good things there as well.

Okay, great. Thanks very much.

Thanks, Melissa.

Your next question comes from the line of Toby Sommer with Suntrust Robinson Humphrey. Please proceed with your question.

Thank you. I'll start with a housekeeping question. I apologize. I joined the call a little bit late, so I may have missed this if you gave it in your prepared remarks. What was the percentage of revenue from your large customers?

AT&T represented 49% of revenue in the quarter and that was down as a percentage from 53% in the first quarter of '07, and then T-Mobile increased to 28% for the current quarter and that was up from 20% in the first quarter of '07.

Thanks. I'm just kind of doing the math, that 49% at AT&T on a dollar basis, it looks like it would be kind of more like stable, given your revenue growth. Is that fair?

AT&T was up 2% for the quarter in aggregate and 5% year-over-year.

5%, okay. And I wanted to ask you from a gross margin standpoint, and I apologize, you probably did touch on this on the call, but to the extent you can expand, that would be great. What mechanisms and tools do you have at your disposal to work through some of these Canadian currency issues?

We've employed an FX or a hedging strategy that employs what are called forward extras and those instruments tend to work very well in a declining FX environment. And throughout 2007, the U.S. dollar, as I'm sure you're aware, steadily declined throughout the year. In the first quarter of 2008, it actually bottomed in Q4 and then kind of got a little bit better as we moved into 2008. So we have looked at some other vehicles that basically expand the collar, if you will, in terms of our floor protection and giving us more flexibility in the upside.

So in the current quarter, our effective FX rate was 1.0, basically parity, as opposed to, in the fourth quarter of 2007, our net hedge -- our net FX rate net of hedges was 1.05, even though the actual spot rate average for the quarter was closer to 1.0.

So as I said, the forward extras worked very well for us and kind of deferred the pain, if you will, of the deteriorating dollar. And now, as we rebound, we hope to see a little bit of improvement in the second quarter of '08 and hopefully, throughout the rest of the year.

But I think at a higher level, to address your question, the dollar -- the Canadian dollar at 1.0 to 1.2 is the new world we live in, so for the next several quarters, we'll be comparing ourselves to last year's numbers and you'll see this differential, so we expect the current world to kind of stabilize where it is, plus or minus. And therefore, rather than have hedging tools, we really need to address the business models there, which can be addressed through pricing, through efficiencies and through better operational utilization.

I guess let me have a follow-up question. I've heard from some other industry players that turnover among employees in Canada has been an issue because of what can be fairly lucrative jobs in the energy sector luring people away from traditional call-center work. Is that something you're seeing and if you're not, what could you do to potentially offset that, should it develop?

Yes, so we are seeing some of that, definitely, but the thing that would offset that that we are seeing also is with the exiting of some U.S. companies from Canada, our recruiting pools have opened up significantly. So we have good applicant flow there. So back to Larry's point, around running tight operations and achieving good economies through utilization.

And I think the impact is less on attrition and more on the absolute wages. We're seeing the minimum wage increase up there; we're seeing wages kind of trickle up because of the energy economy. And it's more true on the West Coast than it is on the East Coast, but as I said, the reality in Canada is that those are the new economics and we either need to work with our clients on price increases or squeeze more out of the operation.

Okay. And then I'll ask one more question and I'll get back in the queue. Since you are aiming towards opening in the Philippines in a few quarters, what business model changes and lessons are you applying to how you enter that market, specifically relative to the currency to minimize what kind of impact any fluctuation there could have in 2009 or '10, once you're actually operating and it's hitting the P&L?

I think there are a couple of factors. The first is the currency factor which will continue to hedge and play the same game we do here. Margins in those operations tend to be considerably higher and therefore, you have more headroom to take some currency hits. Secondly, on the revenue side, you asked the business model. On the revenue side, the revenues for FTE are considerably lower, but the gross margins are higher. So that will change the dynamics.

If we move work from the U.S. to the Philippines, which is not our intention, but there may be situations where we move some, the goal is to get incremental business to move into the Philippines, but when you do move business over, you have a revenue hit, but your gross margins stay consistent. So I think that --

The gross margin dollars stay consistent.

The dollars stay consistent.

The margin improves.

Right.

I'll ask one more question, thanks. In terms of overall kind of workstations now, what's the total that you're operating on right now?

I think we will disclose in the Q and FTE, but we don't disclose the number of stations that we have in capacity.

Okay. Is there another way we can back into it with kind of an --

Well, I think the other way to think about it, we've talked about having roughly 8,000 employees on board and clearly, there are some overhead positions in that number, but --

Full-time, part-time.

If we're growing at double-digits, you can kind of work the FTE.

Okay. Thank you.

Your next question comes from the line of Tom Carpenter with Hilliard Lyons. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Tom.

Good morning.

Good morning.

Can you walk us through the cap ex for this year and break out the part of that that is the Philippines and maybe give us some insight into next year, based on what you see on demands for call-center openings?

Sure. The cap ex for the quarter, as I mentioned, was 3.9 million. About 3.1 of that was associated with the Mansfield opening and there was a little bit of cost associated with Victoria that hit the quarter as well. With respect to the Philippines, as Larry mentioned, we're still in the process of negotiating the lease and getting that signed. So until we have that done and engage architectural firms and general contractor to help us with the buildout, we don't have exact numbers on the cap ex exposure in the Philippines at this point.

However, the research that we have done suggests that even though the site double the cost of a -- excuse me -- even though the site is likely to be double the size of new U.S. sites, the construction costs and the leasehold -- the associated leasehold improvements and furniture and that piece of the equation will not be a whole lot more than what we're experiencing for a single, call it 500-seat site in the U.S.

The IT component is pretty much variable with respect to the number of seats, so that piece of the cap ex equation with respect to the Philippines would probably double with the size of center that we're contemplating. So -- but we haven't -- we made the conscious choice not to disclose an overall cap ex number.

Okay.

But I think to think about a 4 to $5 million site investment and then operating leases associated with the IT equipment on top of that, that's a reasonable benchmark to be thinking about.

I just want to make sure I heard clearly as well that you're going to be using multiple customers for that site. In the past, you might have bandied about going with one specific partner, but this will be multiple and a mix of new and existing?

For the Philippines?

Yes.

Yes, absolutely. It's a multi-floor center as well, which gives you the ability to put competitors in the same building.

Okay. And when you hire in a -- when you go green in a country like that, what type of -- do you use a firm for hiring that's used to hiring for other call centers? Do you run ads in the paper? What's maybe the current plans for that, for bringing a new company into an area?

Well, the first -- we've hired a consultant who's done this multiple times for --

Okay, sure.

-- (inaudible) centers and vendors coming in who has helped us navigate through everything from setting up the subsidiary through hiring management teams to finding facilities. So we've got some pretty good expertise.

Second of all, we've got a team here in-house which soon will be on the ground there to help navigate through the hiring process, as well as building a team on the ground, which should be completed by mid-summer. That team will be doing the recruiting and typically, the way the recruiting is done in the Philippines is there's a lot of walk-in applicants. There's advertising that's done. There's a lot of networking that's done to do the recruiting, so not too dissimilar to here, other than the fact that the labor pool is huge and abundant.

Okay. And I had a question about at StarTek at Home. Did you say you were utilizing agents with the existing customers for a small part of their existing business or were these for new clients?

We're pitching it to new clients, but what's operational today is existing clients that we have moved work from the center to the remote agent.

Okay. And I would take it -- and this is a shot in the dark. Is it less than 10% of the existing clients' business?

Actually, I'd say it's more than 10% of the existing clients' business.

Oh, okay.

Well, and for the clients that have moved.

Yes, yes.

Yes.

Okay. And --

Actually, it started out as a pilot, but it's accelerating pretty rapidly and for the two clients, we are -- there's a pretty big chunk of business that's moving to remote with some very good results. Clearly, it's a different model and clearly, some clients don't want to go near it and other clients are embracing it. So we're being cautious about how we think this scales. If it scales to real numbers, we'll be disclosing how big it is.

Okay. It does sound like you guys have plans to try and get it to real numbers over the next year.

Absolutely.

We definitely have interest in the base.

Okay. I know it's early. Can you give us an idea of when you do achieve scale, what the margins are like? I'm just talking about the --

We're still navigating through that. It's a pretty new program for us. We think there's an improvement there definitely. I don't think we've really quantified that with a sharp pencil yet, but you could -- suffice it to say, with increased utilization, we'll be seeing better results.

Yes, I think the other way to think about it, and clearly, our fixed costs associated with those agents goes way down.

Yes.

The trick is to replace the agents that are working at home with agents that are filling up the site, so that your utilization in the site doesn't go down as your headcount associated with at-home goes up. So there is an opportunity there, but it's contingent upon us back-filling those positions with other types -- other in-center capacity.

Yes, where we think the biggest opportunity for at-home is, is not your typical -- like our competitors, to provide an alternate labor pool. We really believe it's a site-expansion strategy where we can turn a 500-seat center into an 800-seat center by having remote agents around it.

Okay.

That's one of our reasons. The second thing to note is that all of our initiatives here from trying to make sure we get good pricing for our base to moving to at-home to moving to the Philippines is all intended to better our mix of higher margin business.

Well, we're in favor of that.

Aren't we all?

If you were going to do an apples-to-apples basis -- I'm just to pick the first site that jumps out of my head. Let's say like a Petersburg that you opened last year, and let's just say you're utilizing 100 agents also in that area -- I know this is early once again, but can you maybe compare the attrition for at-home people versus a site center?

Yes, what we've seen is that -- again, it's very early on -- it's significantly lower.

That's what I was thinking.

And it's totally through -- the research we've done, we've seen that as well.

Okay. That's good news. And one final question and I'll let some other folks jump back in the queue. T-Mobile was up 15% quarter-over-quarter. I did not catch the year-over-year.

60, 6-0.

60?

It went from 20% of total revenue to 28% of total revenue.

Well, that relationship manager is doing a fantastic job.

You got that right.

They are part of our new site expansion strategy, so that's driven a lot of that increase.

Right. Okay. Thank you, guys. Good luck.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Donna Jaegers with Janco Partners. Please proceed with your question.

Hi, guys. Thanks for taking my question and Larry, congratulations on all the progress you've made since you've been there.

Thanks.

On the -- can you give us just a ball -- on the new centers that you're ramping up in Victoria, Mansfield and Jonesboro, are those sort of the typical U.S. sites with sort of 500 seats?

Yes, absolutely.

And on Victoria, where -- I know you guys don't talk about general capacity utilization, but are you -- can you give us some ballpark as far as how well you're filling that up?

We're on our way, Donna. I'd say roughly halfway.

Okay.

And hitting the targets that we established at the beginning of the year.

Right.

I think where we said last quarter and it's pretty consistent, it takes about six months to ramp a site up and we opened in January and we're halfway there, plus or minus.

Great. And the Jonesboro site, since that's not going to be open until August, do you have contracts already that would use that or are those some of the RFPs that you bid on?

They're existing contracts.

Okay.

But we have identified the client to --

Yes, (inaudible).

Great. And then can you just a little generally about what's going on with pricing in the space? Obviously, wage rates aren't exactly going down in the U.S. Canadian wage rates are up and the currency there. What are you seeing on pricing overall?

I think in general, we're seeing pricing pretty stable. All of the vendors, I think, are feeling the pain of Canada. I think wage rates are pretty stable in the U.S. and therefore, no reason to pass anything back. On a client-by-client basis, we see cat-fighting going on on pricing, but we don't see any major trends there at least in our segment. That may not be true in financial services or other areas, but in our segment, we're not seeing a lot of price pressure or competitive price pressure other than the one client that we talked about.

Okay. And then just one other question. On the Filipino expansion, obviously, some of the firms that have been more in the Manila-Makati area have seen some of the same sort of turnover increases and wage pressures that people were seeing in India. How are you guys going into the Philippines so that you avoid this?

One -- some of that is real and it's not to be avoided. Second of all, we think that we've got a pretty good formula for recruiting talented people and our strategy is a little different than I think some of competitors in that we are transporting the quality delivery mechanism that we have here over there.

And while we'll have to compete on price, we'll continue to compete on quality, which is what our key asset is here. You're right, we're -- it's nowhere near India, by the way, but it is -- both the foreign exchange and the wage inflation are picking up, but it's on a much, much smaller basis. You start with $3 an hour rates, 8%, 10% a year uptick is not as painful as it would be in a U.S. environment.

The other point that you made, Donna, with respect to attrition, while attrition rates have increased in the Philippines, our data at least tells us that it's still significantly lower attrition than we're experiencing and what most firms experience in North America. So that should -- while some of them we need to clearly monitor and watch, it should be an improvement.

Okay, great. Congratulations, guys.

Thanks.

Thanks.

Thanks.

Your next question is a follow-up question from the line of Toby Sommer with Suntrust Robinson Humphrey. Please proceed with your question.

Thank you. My question relates again to the Filipino expansion and you're recently ramping up some U.S. centers and I think we've had a couple in the group broadly who have been a little bit caught by surprise and had their P&Ls hurt near term because some U.S. business wanted to migrate to their offshore work and maybe they weren't fully prepared for that.

Do you have plans in place in case you do get a little bit surprised and more U.S.-type work wants to go and fill that center? In other words, do you have a site or two in mind that you may -- that are under-performing that you could close if indeed, that work wanted to migrate offshore?

Well, I think there's two separate questions there. One is if the acceleration of offshore migration happens, what do we do about it? I'd start by saying that one, we're not seeing that. We are seeing more interest, but not a stampede to take it offshore. If it did happen that way, one, we've got a lot of new business and a lot of growth in our existing clients, as you've seen in this quarter, for new business, we would stop building new sites and kind of retrofit.

And third, as I said in my comments, we're always evaluating every site and there are some sites that get stale and get old and it's time to move on. So we'll have a combination of all of those and I don't think we'll be stuck with sites in those terms. I think if we decide to take some actions on the site, it would be for performance reasons, not for excess capacity reasons.

Thanks. And are you comfortable that you have a good enough read on your customers' overall outsourcing to know that they're not sending a decent amount of work offshore with perhaps other providers because heretofore, that hasn't been an alternative that you have been able to offer your clients?

Yes, we feel like we have a real good read on it. What we're seeing a lot of is more customer segmentation on their side, so today, the interest of going offshore is still small as they segment that portion of their customers, lower loyalty or where accents and voice is not as big a concern. But as we scale capacity in the Philippines, we're prepared for that -- the eventuality of that changing as well.

Thank you very much.

Okay, thanks.

Your next question comes from the line of Tom Carpenter with Hilliard Lyons. Please proceed with your question.

A real quick question on the customer loss. Can you give us the industry?

Communications, how's that?

That narrows it down.

Really don't want to do that because I think it just narrows it down too much.

Okay.

And I do that for the client more than I do for us, so --

Okay. And --

I think we gave you some rough numbers (inaudible) so --

Right. When it went to the other vendor, did it stay in North America or go overseas?

North America.

Okay.

It was a North America price decision that we consciously stopped bidding at some point and the competitor was willing to take it at a price. And based on our philosophy for the last 12 months, we've been trying to make sure we get a fair price from all of our customers. And therefore, having one customer come in and go below our benchmark, it was a tough pill to swallow, but we made the decision and the competitor now has to live with it.

Okay. Got it, thanks.

There are no further questions at this time. I would now like to turn the call back over to Mr. Larry Jones.

Well, thank you, everybody. Obviously, this call is recorded and you can listen to it online and we will keep in touch. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.