Startek Inc (SRT) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StarTek's Second Quarter Earnings Conference Call. My name is Michelle and I will be your coordinator for today. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today's call, Ms. Julie Pierce, Director of SEC Reporting and Investor Relations. Please proceed.

Thanks, Michelle. Good morning, everyone, and thanks for calling in. I'm Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations, and it's my pleasure to welcome everyone to StarTek's second quarter 2008 earnings call. I'm joined on the call today by StarTek's President and Chief Executive Officer, Larry Jones; and Chief Financial Officer, David Durham.

Larry and David will deliver prepared remarks today with some brief comments about this morning's release. At the conclusion of their prepared remarks, they 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.

Please note that the discussion today may contain certain statements which are forward-looking in nature pursuant to the Safe Harbor provision 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 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. These reconciliations can be found in a table at the end of this morning's release as well as on the Investors page of our website under Regulation G.

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

Thank you, Julie, and welcome, everyone.

By now, you may have read the earnings report that we released this morning. Second quarter was another great quarter on the growth and expansion front, but a disappointing quarter from a new sales, margin, and profitability perspective.

During the quarter, we successfully began to ramp another new site, secured a new facility in Manila, posted our third consecutive quarter of double-digit revenue growth, and once again secured new business from our base customers. New sales for the quarter, however, were disappointing. No new contracts were closed in the quarter. But we continue to work diligently on a number of promising prospects. Margin and profitability, by far the largest disappointment in the quarter, was due to operational challenges in a few of our US sites and one-time impairment charges.

I'll talk more about these accomplishments and disappointments in the quarter as well as an outlook for the remainder of the year after Dave talks to you in detail about the quarterly financial results. Dave?

Thanks, Larry; and thanks to everybody for calling in.

Before I get into our results, I would like to point out that this morning we published a financial scorecard on the Investor Relations Reg G section of our website that we hope will provide some helpful insight into our results. This is the first time that we published such a report and believe that this type of disclosure is important for investors to better understand the margin impacts associated with our strategic initiatives as well as understand the underlying operating metrics that are driving our growth.

Specifically, the report provides a revenue, gross margin, FTE, and seat capacity breakdown for our existing US sites, our new US sites, and our Canadian operations. And future reports will include the same information for our activities in the Philippines once we launch there later in the year. My remarks today will be at a fairly high level, and hopefully the scorecard will help fill in the gaps for those that are interested in the next level of granularity.

Moving on to the results, our top line growth for the quarter was very healthy as revenue grew to $65.6 million, an 11.5% increase compared to the second quarter of 2007, and a 1.3% increase compared to last quarter. The growth compared to 2007 was due to a 5% increase in full-time equivalent agent headcount from 5,150 in the second quarter of 2007 to just over 5,400 in the second quarter of 2008. Better pricing and improved productivity accounted for the remainder of that increase.

Approximately 64% of revenue came from our US locations, up from approximately 59% in 2007, with the remainder being delivered from our Canadian sites. Compared to the first quarter of 2008, revenue increased by $900,000, made up of a $2.9 million incremental increase from new sites, primarily our Mansfield, Ohio location, offset by a $1.6 million sequential revenue decline associated with the complete ramp-down of a lost client announced on last quarter's call. The balance of the change was due to a 3% net revenue decline from our Canadian locations driven by lower FTE due to economic conditions in certain sites.

Recognizing that many of you track our client concentration, second quarter revenue from our largest client, AT&T, represented 52% of our total, compared to 53% in the second quarter of 2007. T-Mobile revenue increased to 29% of our total for the current quarter, up from 21% in the second 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.

While revenue growth in the quarter was solid, gross profit was a challenge due to expected drags associated with new site ramps and the ramp-down of the lost client, plus we had unexpected operational challenges in a couple of our US sites which Larry alluded to a minute ago. Compared to the second quarter of 2007, gross profit dollars actually decreased by approximately $100,000 to $8.4 million and, as a percentage of revenue, decreased by 170 basis points from 14.5% to 12.8%.

In Canada, a weaker US to Canadian dollar exchange rate, it was 1.12 in '07 versus 1.02 in '08, was offset by better pricing on certain contracts and the absence of our Hawkesbury facility which was a drag on the gross profit in 2007. Overall, Canadian margins actually improved from 5% in the second quarter of 2007 to 8% in 2008 and, on a weighted average basis, added approximately 100 basis points to overall gross margin. While 8% gross profit is not ideal nor our target for Canada, we are pleased that the Hawkesbury site closure last August and our efforts to improve pricing have begun to show up in our results.

The US gross margin decline was a combination of new site ramp utilization issues which negatively impacted gross profit by approximately 140 basis points and the loss of a high-margin client which accounted for the remainder of the drop. Perhaps the more relevant gross profit comparison, however, is the sequential decline; and compared to last quarter, gross profit dollars decreased by $1.2 million, and, as a percentage of revenue, fell 200 basis points from 14.8% to 12.8%.

In Canada, gross margins improved from 5% last quarter to 8% in the current quarter due to a slightly stronger US to Canadian dollar exchange rate, 1.02 this quarter versus 1.0 a quarter ago, combined with better productivity due to fewer holidays this quarter. And on a weighted basis, Canadian operations added approximately 100 basis points to overall gross profit.

In the US, new sites continued to ramp and had a smaller gross profit dollar loss this quarter than last, but generated twice as much revenue, and consequently had an approximate 30-basis-point negative gross profit -- or gross margin impact. The new site ramp will continue to be an overall drag in the third quarter as Jonesboro launches and we incur costs in the Philippines in preparation for the fourth quarter launch of that site. The remaining ramp-down of a high-margin lost client contributed another 70 basis points and a one-time economic incentive that helped Q1, hurt Q2 on a comparative basis by approximately 80 basis points.

The remainder of the decline, approximately 120 basis points, is the result of isolated and unexpected operational challenges in a couple of US sites. These issues are not systemic, they're being aggressively worked out, and we expect them to be corrected by yearend.

Overall, we expect margins to be relatively flat in the third quarter, with improvement in Q4.

Our selling, general and administrative expenses were stable compared to last quarter and totaled $10.2 million, an increase of $100,000. The slight increase was due to expected incremental costs associated with new US sites and our investment in the Philippines. We did incur severance expense in the quarter, which was offset by a true-up of our incentive compensation accrual and our option expense.

We also incurred impairment and restructuring charges this quarter that totaled $5.5 million. The impairment charges totaled $4.1 million, all of which were non-cash. As part of our site optimization program, we concluded that our -- that closure of our Big Spring, Texas facility was in the best long-term interest of the Company due to the continued recruiting challenges faced in that market. In addition, we assessed the carrying value of the assets in certain Canadian locations and concluded, based on expected future cash flows from those sites, that some of those assets were impaired. We also determined that previously capitalized SAP software development costs were impaired due to our expected replacement of SAP with a loss in HRIS solution.

In addition to the impairment charges, we also incurred a restructuring charge of $1.4 million, which represents an adjustment to the lease reserve on our closed Hawkesbury facility. At the time of that site closure, it was anticipated that the facility would be sublet to cover the majority of the remaining lease liability; however, the sublease that seemed probable has not materialized.

As a result to the gross margin decline and the impairment and restructuring charges, we reported a second quarter 2008 operating loss of $7.3 million compared to a loss of $3.5 million for the second quarter of 2007 which included impairment and restructuring charges of approximately $3 million. Our net loss for the quarter totaled $4.5 million or $0.31 per share compared to $3.4 million and $0.23 per share loss in the second quarter of 2007. Absent impairment and restructuring charges in both periods, the Company lost $0.07 per share in the second quarter of 2008 compared to a loss of $0.06 per share in the same period in 2007.

Moving on to the balance sheet, our balance sheet remains strong with cash and investments totaling $33.4 million at quarter-end, an increase of approximately $1.4 million compared to the cash investments balance at the end of last quarter. An improvement in our accounts receivable collections was offset by an increase in CapEx to account for the net increase. CapEx for the quarter totaled $8.8 million which included the bulk of the cost associated with the build out of our Mansfield, Ohio and Jonesboro, Arkansas sites. And depreciation expense totaled $4.7 million.

With that, I will turn the call back over to Larry.

Thanks, Dave. I'd next like to focus on our growth initiatives, our operations, and our outlook for the rest of 2009.

By now, it should be clear that the executive team is focused on growing the business on all fronts. During the quarter, we continued to grow our base business. We also continued to add new US sites and prepare for the launch of our offshore operation.

Unlike many of our competitors, we're fortunate to serve only the communications and technology markets, both of which continue to show a strong demand for customer care services in this uncertain economy. Our two largest clients continue to grow nicely. AT&A year-over-year quarterly revenues grew by 10% and T-Mobile quarterly revenues grew by 79%.

During the quarter, we finally signed the customer contract renewal for AT&T's consumer wireless care business that extends the contract through April of 2010. Our performance in relationship with the 15 lines of business within AT&T remains strong and we expect to see incremental growth over the next several quarters. Growth within both of these clients is driven by strong subscriber and product demand in the wireless sector. This growth also helps offset the revenue declines in our lost client.

While our new sales have been disappointing, we continue to add new business within the base. During the quarter, we were awarded one new line of business within one telco account and awarded incremental seats in another cable provider.

By far, the biggest accomplishment in the quarter was our progress in expanding our US and offshore facilities. During the quarter, our two new sites in Victoria, Texas and Mansfield, Ohio continued to ramp. Our Jonesboro, Arkansas facility is nearly complete and is scheduled to take its first call later this month. All three of these sites will provide us with capacity for pre-committed client growth.

Earlier this month, we also announced that we signed a lease for our new 7,800-square-foot, 1,100-set facility in downtown Manila. We believe that the Philippines represents a significant growth opportunity as our clients begin to search for offshore, low-cost, high-quality customer care alternatives. Given the high literacy rate, English-speaking, college-educated workers there, with their great cultural affinity for the US and customer care skills, the Philippines is becoming the de facto choice for our clients moving customer care offshore. During the quarter, we expanded our Philippines team which is now 17-strong. We're preparing for an opening with an existing client this fall.

Let me now turn to the operation side of the business. As you may recall, in 2006, the business was challenged with our inability to staff FTE [technical difficulty] revenues and margins. In 2007, we implemented programs to turn that situation around and, by late 2007, we were growing and adding headcount, primarily in the US.

At the same time, our Canadian operations was negatively-impact by the declining US dollar and wage rate increases. As Dave and the scorecard indicate, the margins in Canada deteriorated throughout 2007 and have recovered slightly as we negotiated price increases, made operational improvements, and closed our non-performing Hawkesbury site.

In the US operations, we made similar operational improvements through 2007, resulting in increasing margins. In late 2007, however, several of our sites began to experience labor shortages due to deteriorating labor markets in the local markets. Recognizing this in the first half of 2008, we implemented wage increases in select sites, and after consulting with our client there, decided to close the Big Spring site. Both of these actions, along with the loss of a profitable client, resulted in lower second quarter US gross margins.

By the fourth quarter and into 2009, we expect to see margins improve. This will be a result of a number of factors, namely -- new sites ramping and starting to have increased profit contributions, our continued efforts to evaluate underperforming sites and taking the actions necessary, and ongoing operational improvements in all of our sites.

Let me quickly discuss some of those operational improvement initiatives that we have underway. First, we recently made change in our operations executive team. As a result of the departure of our COO, we have promoted several very talented operational execs that will operate as a team. Along with more direct involvement of myself, this team is focused on our clients, continuing to provide them the best-quality service in the industry, and on strengthening the operational financial performance of every site.

Second, our recruiting engine has improved dramatically and we're now able to meet our client demand in most sites except for those markets where we see labor shortages. In those cases, we'll take the appropriate actions to improve or exit that market.

Third, our site leadership has improved over the past year and we have implemented new leadership programs to ensure the quality and consistency of our current site directors and our ability to homegrown new site leadership for expansion.

And finally, while attrition has improved in a number of sites, it is still a challenge in many of our locations. We have doubled down our efforts and have developed programs to address these issues on a site-by-site basis.

Through all of these programs -- site optimization, new executives, recruiting, training, leadership development, and attrition program -- we expect to see continued improvement in our operational and financial programs in all these sites.

Now, to our 2008 outlook -- we continue to be optimistic about the overall business and the financial outlook for 2008 and beyond. The demand environment remains strong and our site and offshore expansion strategy is progressing as planned. As a result, we expect revenue to continue to grow at double-digit rates compared to 2007 as new sites come online and as our clients continue to reward us with new business.

We also expect gross margins to improve by yearend, though in the third quarter we expect our investment in new sites and operational challenges to continue to dampen our gross margins. And finally, we expect SG&A expenses to increase slightly in the third and fourth quarters as we incur incremental costs associated with our new US sites and investment in the Philippines operation.

Add it all up and we believe that StarTek is on track for growth and profitability as we enter 2009.

Thank you, and now I'd like to open it up for questions.

Thank you. (Operator Instructions)

And your first question comes from the line of Arnie Ursaner of CJS. Please proceed.

Hi, good morning. That was a very --

Good morning, Arnie.

Hey, Arnie.

-- very thorough rundown that covered most of the questions I think many of us would have.

One I do have, you mentioned you got pre-commitments for client growth on your domestic facilities, and you mentioned the Philippines one is targeted for an existing client. Will that existing client who is shifting to the Philippines, will they be moving stuff from the domestic side or is it incremental demand for them?

Hello? Hello?

Hello, Mr. Jones?

Hello? This is Arnie Ursaner. Hello?

Speakers, if your line is muted, please un-mute.

Can you hear me now?

Ladies and gentlemen, please stand by. We are having a technical difficulty and we will be back with you in one moment.

[technical difficulty]

Hello, we are back. Sorry for the technical difficulties on our phone side.

The question I think that Arnie had posted was -- what clients have committed to go to the Philippines and what are you doing about filling the site up?

I think as I was in the middle of saying, that we've got one client who's committed to a small number. We're also building that center out in two phases, where it's 450 seats in the first phase and the remaining when we see demand. But we are also working the existing customer base and the new prospect list, and our expectations, although it's early, is that we will get half of our capacity in the Philippines filled with existing customers and half-filled from new prospects.

The question I was really going towards is, are you taking -- are you shifting these from existing domestic units to the international one?

Right. And I think about half of the volume in the Philippines is expected to come from existing shift of business from A to B, but the other half is expected to come from new business.

So, will you have to add new clients in the domestic side to replace them?

We are doing that, and I expect that the US demand is still pretty strong. We are uncertain right now as we go -- obviously built three centers this year and have pre-committed as we look at 2009. At this point, we don't have any US sites slated to be built, but that could change. But -- so new business would go into where existing business might be moved offshore.

Two more very quick questions on -- assuming the website has the information, it will answer many of these, but you mentioned you have a true-up in the quarter to reverse some bonus and some other expense accruals. Can you quantify that so we can get a better feel for run rate G&A?

Yes, I think it's fair to say that the severance and those true-ups offset each other. So it was pretty a wash. I would expect, on a sequential basis, for SG&A to maybe go up a couple of hundred thousand dollars in Q3 and in Q4 as we reset incentive bonus targets and spend incremental amounts in the Philippines and in Jonesboro.

Okay. My final question, I know you've been somewhat reluctant to give guidance, although you're getting awfully close in the sense of revenue growth rates and some other items to help build it. But can you give us a feel for what you believe your exiting gross margin number might look like for this year?

Yes, I think that's a level of detail that at this point we're just not comfortable giving, other than to say, as Larry mentioned, that we do expect improvement in Q4 and we think we're going to be well positioned as we enter 2009.

Thank you very much.

You're welcome.

And your next question comes from the line of Tobey Sommer of SunTrust Robinson Humphrey. Please proceed.

Thanks. I had a question for you about the sites that you have existing, how many of them you'd characterize as kind of in tight supply for labor, because I think your prepared remarks, when you're talking about recruitment, you say you're making some improvements, but of course, if there are areas you'd think about taking action in the sites where you are having particular trouble with in recruitment, how many fall into that bucket currently?

I'd say there's only several. There are varying degrees of tightness in the marketplace. And I think we've talked about before that sites have a lifecycle. And while the labor market may be tightening in some sites, that means that they're coming off of a high of FTE and our ability to continue to fill that site up. And at some point you cry uncle and you decide that the site's not worthy of keeping it open anymore.

So I would say that we've talked about several few sites in a situation that we're working hard from an operational perspective, but it's not across the entire network.

Okay --

I think part of the margin decline too in the current quarter, particularly in the US, was a function of some wage increases that we felt appropriate. And we expect those wage increases to translate into FTE growth as we go into Q3 and Q4. And we're seeing -- we are starting to see the benefit of that.

So, the wage increases enabled you to attract people more easily?

Yes.

Yes. And that's the only reason we give wage increases in a declining market, is that we believe we can sustain or grow the FTE in that location, which utilization of a site is, yes, clearly a bigger contributor to gross margin than the wage increases.

Right. In the -- just trying to assess the frequency that you may have to have restructuring changes or close centers, did you raise the threshold on how you were evaluating the challenges on your portfolio of centers to try to clean the decks a little bit in this quarter? Or could, conceivably, another closure or restructuring charge hit one of the upcoming quarters and offset some of this progress you may see in the Philippines or in your other ramps of the newly opened centers?

Well, I think last quarter we talked about what we called the site optimization program. And site optimization is either making sure that we increase the performance of a site or we actually look at assessing getting out of the local markets.

Between now and the end of 2009, I think you can say that we'll continue to assess those sites that are underperforming and we may have one, two, three over a six-quarter period, but at this point we don't know, and we're not -- we don't have a plan to shut down the number of sites. But we are being very critical of ourselves in evaluating those sites to a point where if wage increases or operating management performance doesn't fix the site, we're more than prepared to take another restructuring charge to optimize the delivery platform.

Okay. And the sales you're -- growth you're getting from your embedded base, is -- do you think that's a function of an increased proportion of outsourcing, greater overall demand, or combination of both? And maybe you could -- if it is a combination of both, could you say which one is maybe a bigger driver?

They clearly are both. I think it varies client to client. In one client I can say that it's -- we're getting a bigger proportion, on another client it's just massive growth within the -- their demand for seats. So it -- in some of the other clients, it's probably slightly tipped toward more percentage of the outsourcing pool. The clients are also outsourcing more. So you got really three phenomena going on -- one, our performance relative to other vendors; two, more percentage being outsourced; and then three is just overall demand for seats. And they vary client by client, but one of those three things is happening in most of our clients.

Okay. Just trying to assess how you're going to navigate the migration of some of your business to the Philippines. When you look at the work you're doing -- I guess in this case I'm asking specifically about AT&T and T-Mobile -- is a large proportion of that work work that is sticky for the US or -- I should say North America -- or could all that work go to the Philippines? I'm just trying to assess what the risk is on the kind of the flood gates opening up on clients wanting to transition that work and you being obliged to do it and potentially impacting margins.

Good question. First of all, that should have a positive effect on margins as we move and change the mix.

But the reality is that they are still slow to move in the sectors we're in. So, in the communications sector, particularly in the wireless sector, the first thing they will move will be the low end part of the business, which is a relatively small percentage of the business -- think prepaid phone activations. And we don't know how fast that will accelerate. At this point there's no indication that it's going to be a massive shift offshore.

Plus -- so that's our insights into the customers. We ask various customers; nobody is in a hurry to go offshore. At the same time, we don't have a lot of experience here. So, really in the next several quarters, as we start to ramp up in the Philippines, I think one of the better experience curve as to what does it take to migrate someone off, how do you do that.

But it's clearly a positive thing to be doing that in a growing environment. So as you have more demand in the US, we may not have to build facilities, but hopefully the migration will be nice and orderly and work out the way we'd like it to work out. But until we can really assess the demand at the client and how fast that migration from their perspective occurs, we're not going to know.

Okay. Yes. Ultimately, I guess, in a steady state, the margins are improved by the mix shift --

Yes.

-- but that transition can be cumbersome.

In terms of the phase one that you have for the Philippines -- I think you said 450 seats?

Yes.

Is that being filled by the existing client moving there or is that existing client only going to fill a portion of that phase one?

Only fill actually a small proportion of that, less than 25% of that.

Okay.

So we're still working on both existing clients and new prospects that would take the rest of it. And once we get that committed, we'll build up the next phase.

I'll ask one last question, I'll get back in the queue. Regarding the new sales, call it pipeline, I guess --

Yes.

-- for lack of a better term, could you give us any color on changes there in your conversations with customer? Are the decisions lengthening, or is something else going on?

We've got a lot of activity going on. There is a pretty big percentage of delayed or deferred decision going on, so, either staying with our current vendor or just not making a decision to switch or not making a decision to add the seats that they were going on. In only one case year-to-date did we lose to a competitive scenario. So it's not that we're not competitive. I think it's a pretty slow lengthening process that we're going out.

We've got over a dozen prospects in the queue that we're working hard. And I'm frustrated with the fact that we can't get them over the goal line.

Right. And I'll ask one follow-up on that answer. Thank you. The dozen or so prospects, are they communications technology type prospects? And that one that you lost, do you have an assessment as to why you lost it? Was it price or some other reason?

It was not price. It was just a competitive bid that we got down to the final list and just didn't win it. And it was probably -- I mean I can't even tell you, it was so close that it's not even -- it was not price.

And yes, the majority of the pipeline is in -- it's probably 50% telco -- communications and 50% technology.

Thank you very much. I'll get back in the queue.

And your next question comes from the line of [Jason Schacht] of Heartland Advisors. Please proceed.

Hey, good morning, guys.

Hey, Jason.

Good morning.

Can you tell me, what are -- what were the typical cash cost fee of closing down an average facility?

It's really all over the board and it's a function of the age of the site and what -- the bulk of the impairment costs relate to the unamortized value of primarily leasehold improvements, because other assets you can typically move to other locations and utilize. So it's really a function of how much time is remaining on the lease, so what's the lease liability; and then with respect to the leasehold, how much did it cost you to build the site in the first place. And again, whatever is left on the lease is -- that percentage is on the books and needs to be written off.

So in the case of Big Spring, it was a relatively inexpensive shutdown -- order of magnitude, a little over $1 million. Of the $4.1 million, a little over $1 million was associated to Big Spring. But it's all over the board.

And the case value does relate to both, the time left on the lease, how expensive the lease was, and also if there's an opportunity to sublease or settle with the landlord. So, again, we do have situations where we've been there a long time, where the number is low, and we have situations like Hawkesbury where we weren't there very long, but the number was high.

Yes. And in the case of Hawkesbury, to Larry's sublease comment, early -- soon after we made the decision to close, we had a couple of very active subtenant prospects and over time those prospects just went away. So our assessment with respect to our ability to subletting changed and resulted this quarter in the remaining restructuring charge.

Okay. And then, in regards to the operational issues at some of your existing sites that you mentioned previously, I mean, is that a result of lack of focus here as you've looked at expanding in the Philippines? Or -- I mean, how does something like that happen, if you could elaborate a little bit on that?

Yes. First of all, I'll say it's not systemic, and it is isolated, and it varies by site. We have one site where we had management issues -- site management issues. We had another site where we had a difficult labor market. We had other sites where it's a difficult type of work in trying to scale up the center so that we get high utilization. And again, we call that operational and financial issue. If we don't utilize a site and we've only got 200 people on a site that's 400, of course, that's a problem.

So they vary all over the place. But again, it's not -- it's a handful, tops, that we're talking about.

Okay. Thanks, guys.

Thank you.

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

Guys, how are you?

Great.

Hey, Tom.

How are you?

On the new business that you guys are pitching to you, -- you'd already talked about what industries it is -- can you talk about the type of work it is, whether it's inbound calling, outbound calling, stuff you guys are already doing before, or it's some new categories?

Well, a couple of comments. First of all, we don't do any inbound -- I mean, don't do any outbound. All of our business is around care. And if you think of a continuum, we do basic care, business care, tech support, order management, complex order management. That's kind of the continuum.

The good news is that most of the things in the pipeline are in the upper end of that scale. A disproportional amount is in the tech support area. But we do have cable in there, cable care, we do have telco care, wireless care in the pipeline. So it's more toward the high-end, high-margin side of the business, which we like, and less toward the low end of the wireless kind of care.

So, I hope that helps.

Excellent. You gave me a good segue to the next question. When you came onboard in late '06 and early '07, you talked about your margin goal and I think it was 20% or north of there. We're still aways away and you guys could have passed this year because new facilities and taking the right growth initiatives for the future. Is close to 20% realistic in '09? Are we talking about more '010 because that gives you a chance to shift some business in the Philippines and ramp that facility?

Yes, I'll take that, this is Dave. I think it's really a function of how quickly the mix changes. And our internal targets, we've I think given a pretty reasonable breakdown of the gross profit percentages between US, Canada. We haven't disclosed Philippines because we're not there yet. But our targets would be to get our US sites back at north of 20% or just above that. Canada, we believe we can get to 10% with, again, continued site optimization and improving the utilization in a couple of locations. And then, the Philippines, our target would be roughly 30% gross profit.

So it's really a function of the mix between those three geographic locations and how quickly we can migrate towards the higher-margin business in the Philippines.

So it's probably premature for us to say that -- whether that's '09 or 2010. But I think the main message is that, as the new sites ramp throughout this year and the Philippines comes online, that we will see some meaningful improvements in '09.

Right, I see your, based on the thing you guys dropped this morning on the US and Canada, you guys are more or less there. And US had a little dip this quarter, Canada is obviously a trouble spot. And this might be something you can address offline, but, on your margins, what would a 10% increase in the value of the US dollar have on your Canadian margins?

Yes -- well, I think it's largely a function of how much volume we're doing in Canada. But it would have -- well, to give you an example. We went from 1.12 to 1.02 in the second quarter of 2007 to the second quarter of 2008. And while we didn't quantify -- we're starting to get into kind of Reg G disclosure, a disclosure discussion, again, we purposely didn't quantify that this quarter -- but we had a 300-basis-point increase in margins in Canada. And I would say roughly half of -- well, the decrease would have been probably about 150 or 200 basis points had we not had the price increases and had the Hawkesbury situation behind us.

Okay. I guess, yes, that's very helpful because I know you guys had hedged some in the past, you also had some natural hedging. So I was just curious, if the US dollar does appreciate over the next year, what type of benefit you're going to see. And I think you answered the question. Thank you.

Sorry to be vague.

Triangulate.

(Operator Instructions). Your next question comes from the line of Josh Vogel of Sidoti & Company. Please proceed.

Hey, good morning. Thank you. I apologize, I just jumped on the call. So if I repeat anything or have you repeat anything, I'm sorry. But, what was the Canadian currency impact on gross profits last quarter?

We didn't specifically quantify the impact, but only to say that our weighted average exchange rate this quarter was 1.02 versus 1.0 in the first quarter of 2008. And in second quarter of 2007, the effective exchange rate net of hedges was 1.12.

Okay. I think on your first quarter press release you did quantify the impact to gross profit --

Yes, we did, and we chose not to, this quarter, just for disclosure.

Okay. But was it up or down sequentially, could you tell us that?

Sequentially, the dollar actually strengthened, US dollar actually strengthened a little bit against the Canadian dollar from, again, from 1 -- from parity to 1.02.

Okay. And I'm sure you already said this, but what percentage of your revenue is coming from Canada?

Roughly 36%.

Okay.

In the table, scorecard (inaudible)

Okay, great. And as you're looking -- as we are making the move into the Philippines, do you have hedging strategy in place against the peso?

We're looking at strategies similar to those that we've employed for our Canadian operations. But just due to the relatively low volume, we haven't really done anything aggressive, but plan to as volume increases a little.

Okay. And what about for the seats you're building out in the Philippines -- I think someone mentioned, that was right when I jumped on, about phase one being 450 seats. But as the site is fully ramped, how much of that demand is already in place today?

We have a small percentage of it committed and we have a lot of activity and discussions going on with both our base clients as well as prospects. So if you're looking -- if your question is about hard commitments, it's a small percentage of that. This is more of a greenfield site than any of the other sites that we had.

Okay. And then just looking back in Q2 with -- can you quantify at all the costs that were associated with just any Filipino related cost basically?

We spent -- it negatively impact -- well, we spent about $150,000 in SG&A in the Philippines in the current quarter.

Okay. And could you give us any idea what that will look like in Q3?

That, I don't really want to get that specific. It will go up, for sure, and we will actually incur some costs in-country that will hit our cost of goods sold -- our cost to sales number. So you'll see a slight increase in SG&A and then a little bit of negative drag on gross profit.

Okay, great. And just lastly, the percentage contributions from AT&T and T-Mobile?

Yes, those -- AT&T represented 52% of revenue, up -- or down from 53% the year-ago quarter. And T-Mobile was 29% of revenue, up from 21% a year ago.

Great, I appreciate it. Thank you.

Sure.

And your next question comes from the line of Tobey Sommer of SunTrust Robinson Humphrey. Please proceed.

Thanks. Just wanted to see if you could repeat some of the, I guess not guidance, but your perspective on some trends for revenue and gross margin that you had in your prepared remarks. Excuse me. I don't think that I jotted it all down. Thanks.

Yes, I -- this is Dave. We, basically from a top line perspective, indicated that we expect continued double-digit growth on a quarterly basis in Q3 and Q4 compared to the same quarters in 2007. And then with respect to gross margin, we expect the third quarter to be relatively flat to Q2, with improvement in Q4. And the drag in the Q3 quarter is really a function of the new site ramp in Jonesboro and also the Philippines. And then some of the operational challenges that we alluded are likely going to take a quarter to get through those and see some meaningful improvement such that in Q4 we've got less drag associated with ramp and some of those operational issues have fully been resolved.

Okay. Thank you very much.

Yes.

And your next question comes from the line of [George Gent], a private investor. Please proceed.

Good morning.

Hi.

Hey, George.

I was wondering, what's the total tax loss carry-forwards as of second quarter that will be available to offset profits in future periods?

George, I don't have that number off the top of my head. I'd be happy to follow up with you. Yes, I don't think it's a meaningful number.

Okay. Well, thank you very much.

Yes.

And your next question comes from the line of Nicole Conway of Thomas Weisel. Please proceed.

Good morning, guys.

Good morning.

Hey, Nicole.

Hi. So, Convergys recently reported and said that they saw some clients were using more automation which was hurting volumes. And I was curious if you see this as a trend at all and also if there's been any kind of big shift in the volumes in your current book of business that might affect margins, if it's a higher-margin -- it's turning towards higher-margin business or lower-margin business.

I think on the first question of automation, I think there's been a multiyear trend for clients to use IDR, self-help chat, other types of web-based products, to try to offset the growing for seats. We haven't seen any major change in the last quarter or two in that. And in fact, that automation is far from keeping up with the increased demand, resulting in a net positive seats in every one of our customers.

Your second question, I think, was about the mix. We are seeing, and as I said our earlier, in our pipeline, a lot more high-margin tech support, business care type of opportunities, which will give us the opportunity to grow quicker in the higher-margin end of our business. But till we close those, it's -- they're not a reality.

That's the pipeline, and also growth within the current book of business is trending towards higher-margin?

I think the current book of business is growing pretty proportionately across all kinds of lines of business, so, both in the AT&T high-end care as well as the prepaids, across the board, I think we're seeing growth pretty proportional there.

Right. Thank you.

And that does conclude the question-and-answer session. We'll now turn it back to Mr. Jones for closing remarks.

Well, thank you, everybody, for joining us today, and good questions, and look forward to talking to you next quarter. Thanks.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.