Startek Inc (SRT) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 StarTek Earnings Conference Call. My name is Clarissa and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations. Please proceed.

Thanks, Clarissa. Good morning, everyone, and thanks for calling in. I'm Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations, and it is my pleasure to welcome everyone to StarTek's third 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 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 10-K and subsequent quarterly filings 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 measurements. 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 will now turn the call over to Larry Jones, StarTek's President and CEO.

Thank you, Julie, and welcome, everyone.

By now, hopefully you've read the earnings report that we released this morning. In that release, we reported continued top line growth, 9.3% for the quarter and 11% for the first nine months of the year, compared to the same period in 2007. We also reported gross margins of 12%, down slightly from the prior quarter due to the impact of new sites that we launched during the quarter. Our EPS loss of $0.13 was driven by these lower margins and a couple of unique below-the-line charges that Dave will discuss in detail.

Our operations improved considerably in the quarter. Existing US site margins improved as many of the management and operational improvements that we talked about last quarter produced positive results. Our T-Mobile and AT&T relationships remain strong, and revenues from both these accounts are up considerable from last year. The three new US sites generated a profit this quarter; and most exciting, we launched our new Philippines site that opened in September.

Despite the general economic downturn, overall outsourcing trends are positive and demand from our communication clients remained strong. As we look into 2009, however, we're taking the appropriate level of caution to ensure that our growth and offshore expansion efforts do not disrupt our continued path to profitability. More on this later.

I will now turn the call over to Dave Durham, our CFO, who will discuss the financial results for the quarter. After his discussion, I'll return and review the major accomplishments and disappointments for the quarter and discuss our plans and outlook for the fourth quarter and 2009. 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 section of our website. We started doing this last quarter, and our intent is for the report, which provides a metric breakdown for our established US sites, our new US sites, our Canadian operations, and now our Philippines operations, to offer useful insight into our progress on our site optimization and site expansion strategies. 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 another level of detail.

So moving on to our results, as Larry mentioned, our top line growth for the quarter and year-to-date was very healthy. For the quarter, revenue grew to $69.1 million, a 9.3% increase compared to the third quarter of 2007, and a 5.2% increase compared to last quarter. For the first nine months of 2008, revenue totaled $199.4 million, an 11% increase compared to the same period in 2007.

The current quarter growth compared to 2007 was due to a 5% increase in full-time equivalent agent head count, from 5,350 in the third quarter of '07 to just over 5,600 in the third quarter of '08. The remainder of that increase was due to better pricing.

Approximately 68% of revenues came from our US locations, up from 63% in 2007, due to incremental revenue of $9.6 million from new sites. Revenue from our Canadian sites fell from 37% of the total in 2007 to 31% of the total in 2008, and in dollars declined by $1.7 million. Closure of our Hawkesbury site in August of 2007, part of our overall site optimization strategy, accounted for most of the decline, but revenue also fell in a couple of select sites where current economic conditions made hiring difficult.

Compared to last quarter, revenue increased by $3.4 million or 5.2%. The increase was made up of a $3.7 million incremental increase from new US sites, primarily our Mansfield, Ohio location, and $1.9 million increase in our base US location. The increased revenue contribution from our established US locations is despite a $1.1 million drop from our Big Spring, Texas facility which we closed in August of this year. Offsetting these increases was a $2.2 million sequential decline in revenue contributed by our Canadian location, driven by lower FTE due to economic conditions mentioned above.

Recognizing that many of you track our client concentration, second quarter revenue from our largest client, AT&T, represented 56% of our total, compared to 49% in the third quarter of '07. T-Mobile revenue increased to 26% for the current quarter, up from 23% in the third 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 for the quarter and year-to-date was solid, gross profit fell in dollars and as a percentage of revenue compared to the prior-year quarter, compared to last quarter, and for the comparative nine-month period.

Current order gross profit totaled $8.3 million or 12% revenue, but included $1.1 million of negative gross profit associated with the investment in our Jonesboro and Manila site launches. Absent that investment, gross margin in the current quarter would have been approximately 13.8% and an improvement compared to last quarter's 12.8%.

Better performance from our US-based sites which improved to 19% compared to last quarter's 18% and the successful ramp of our Mansfield, Ohio location launched last March, which contributed $1 million more in gross profit this quarter than last. This was offset by Canadian margins, which slipped to 6.1% from 8.1% last quarter, the decline due to a 7% drop in agent head count, translating into lower utilization and GP.

Compared to the third quarter of 2007, gross margins dropped from 16.3% to 12%. Over half of that decline was due to our investment in new US sites and in the Philippines. And the remainder was due to the loss of a client early in 2008 that was the main cause of the drop in our US-based sites from 24% to 19% in the current quarter.

Overall, this quarter's low gross margin was expected given that we launched two sites and laid the groundwork in our base US sites to replace the revenue and margin from the client that we lost earlier in the year.

Going forward we expect margins to steadily improve as our US-based sites move towards the normalized 20% range, our new US sites fully ramped in early 2009, and Canada starts to benefit in 2009 from an improving US to Canadian dollar exchange rate.

Selling, general and administrative expenses this quarter totaled $10.2 million, the same as last quarter, despite approximately $200,000 in incremental costs in the Philippines and $200,000 in incremental option expense. These increases were offset in part by lower consulting and telephony expenses, the result of cost-saving efforts initiated earlier in the year.

We realized healthy SG&A operating leverage this quarter, reducing expense as a percentage of revenue to 14.8% compared to 15.6% last quarter and 15.3% in Q3 of 2007. Next quarter we expect SG&A expense to be about the same to slightly higher as we expect to incur higher sales and marketing expenses, but overall expect SG&A to continue to decrease as a percentage of revenue.

As reported in this morning's release, our loss for the quarter totaled $1.9 million or $0.13 per share, and included three items that are worth singling out.

The first is a $350,000 restructuring charge associated with the closure of our Big Spring, Texas facility that we announced last quarter. The impairment of the assets of that site hit us last quarter and the remainder of -- and the remaining lease liability which made up this quarter's restructuring cost was taken in the quarter that we actually ceased operations, which was August of this year.

The second item is a $440,000 charge against a Lehman Brothers senior subordinated debenture held in the company's investment portfolio. Par value of the debenture originally scheduled to mature next month is $500,000, and we wrote this bond down to its current market value of approximately $60,000. We don't know the precise recovery amount until Lehman's bankruptcy liquidation is complete.

The third and final item is a full reserve taken against the $740,000 unsecured note receivables related to the 2005 sale of our supply chain division. We took the note as partial consideration of the sale price. And due to the delinquency of interest owed and the apparent inability of that company to make an upcoming principal payment, we decided to take the reserve. We do, however, intend to aggressively pursue payment, and hope to be able to report a recovery at some point in the future.

Excluding these three items from our results, the Company's net loss would have been $0.07 per share.

Despite the net loss, the Company generated cash from operating activities during the quarter of $9.3 million and maintained a strong balance sheet at quarter-end, holding $30.7 million in cash and investments with $8.3 million of total debt.

The cash and investments balance does represent a decrease of approximately $2.7 million compared to the balance at the end of last quarter, an improvement in days sales outstanding down to 62 days and a corresponding drop in accounts receivable, combined with higher-than-normal accounts payable expense associated with Philippine leasehold expenses owed at quarter-end, was offset by an increase in CapEx to account for the next cash decrease.

CapEx for the quarter totaled $10.2 million, which is obviously a big number for us. Approximately $7 million of that went toward the build out of our Jonesboro and Manila sites, both of which are now substantially complete. We expect CapEx to be in the $4 million to $5 million range in the fourth quarter, and then still lower on a quarterly basis in 2009.

Finally, depreciation expense totaled $4.4 million in the current quarter.

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

Thanks, Dave.

Next I'd like to discuss our third quarter accomplishments and disappointments and our plans and outlook for the fourth quarter and 2009. Let me start with operations.

As I indicated in our opening remarks, our biggest accomplishment for the quarter was the gains that we made in the performance of our delivery platform. Our overall site performance continues to improve despite continued US and Canadian wage pressure. In the US, we reported higher margins and utilization for both existing and new sites over the prior quarter. Canadian margins, however, continue to lag the US due to FX and wage challenges, although the strengthening dollar should drive higher Canadian margins as we enter 2009.

Throughout 2008 we've been focused on a number of key initiatives to improve the operational and financial performance of our delivery platform. These initiatives included operational management changes, programs to address attrition, recruiting and utilization, targeting non-performing sites for closure in communities that no longer support growth, modernizing and automating our operational infrastructure, adding new US sites, and expanding offshore, initially in the Philippines. Let me talk about each of these separately.

First, our new operations management team is exceptional and has transitioned into their new role seamlessly. They have brought a fresh new look at improving our operation through new levels of accountability and client engagement.

Second, we continue to make improvements in our recruiting and attrition metrics. Our focus on recruiting has been on attracting, screening and hiring higher-quality agents. Once hired, our focus has been on training them effectively and retaining them. Over the past 12 months, we have initiated a number of programs to fight agent attrition with slow but steady results. The net effect of these programs has been to grow FTE in many of our sites, thus increasing utilization. In addition, we continue to experiment with at-home agents as a way to tap broader labor pools in remote areas adjacent to existing sites, and thus increasing utilization in these sites.

Third, we've been targeting non-performing sites for closure in labor markets that no longer support growth. Over the past 18 months we've closed two sites including our recent decision to close the Big Spring, Texas site after nine years, because the saturated labor pool in that community no longer warranted this operation. These closures are intended to drive improved utilization and margins; and to 2009, we'll continue to assess non-performing sites and make the hard decisions to close sites that are a drag on our profitability.

Fourth, margin improvement opportunities exist from automating, standardizing, and modernizing our operational infrastructure. We've begun to centralize our resource planning function with the goal to offshore a significant part of this group. We're developing a new learning management system for agent training and employee development programs. And in 2009, we'll be launching new IT systems that allow us to automate much of our manual processes in the center that measure and drive agent performance.

Fifth, our US site expansion efforts are driving a lot of our growth. You should recall that we opened three new centers in the US in 2008 not as Greenfield sites but in response to existing client demand. Therefore, filling these sites is only paced by our ability to recruit agents to fill the capacity of each site. While each site we open results in a drag in short-term margins, once they are fully ramped, they will drive improved US gross margins and overall company profitability.

Finally, the offshore expansion initiative that we started in April resulted in the opening of our new 1,100-seat center in the Philippines in September that is currently live with 70 agents. We have another 200 seats committed in Q1 and have a number of promising opportunities in our sales pipeline. Our plan is to have this center profitable in the second quarter of 2009.

As we look into 2009, we are also evaluating opening a small operation in Latin America, primarily to meet the demand of Spanish-speaking agents, and may look at launching one more site in the US or Philippines as client demand warrants.

Let me turn to industry and client trends.

We're very fortunate not to have client exposure in industries that are being affected by today's economic downturn such as financial services and retail. Having said that, we do expect that the lack of consumer confidence and spending will impact the communication sectors as we enter 2009 if the current trends continue. How dramatic an impact on call volumes and pricing pressure in our markets is anyone's guess. Therefore, we're being very cautious and mindful of this as we plan for 2009 by scrutinizing all SG&A and capital expenditures and ensuring that we do not get over-extended or interrupt our plans to profitability.

On the positive side, economic downturns usually drive more outsourcing as clients look for ways to cut costs.

Meanwhile, our relationships remain strong and our sales pipeline continues to grow. During the quarter, two clients awarded us new business, and many of our existing programs continue to grow. Recently we added a small trial for a new client in the cable sector that also has promise for expansion.

Last month we announced the departure of our SVP of Sales. We have a search underway for his replacement and are in the process of restructuring our sales and marketing operation to drive new leads and to increase our closure rates. During the quarter we also added two new sales directors who have already produced solid results. Needless to say, I'm keenly focused on rebuilding the sales and marketing operation under new leadership to drive much better success in adding [new logo] sales in 2009.

Our disappointments -- our biggest disappointment for the quarter is the dramatic decline in our stock price from around $9 in June to around $3 today. We can account for this dramatic growth through the overall market conditions, even more dramatic declines in our BPO sector, and for the considerable lack of liquidity in the market, especially for small cap companies.

To mitigate this decline, we're focused on executing our plan, communicating our results, and ensuring investors of our long-term viability, growth, profitability, and strong balance sheet. In addition, we're stepping up our investor relations' activities to ensure our message is reached by analysts, the institutions, and the general investor base.

With time, we hope that the markets will return to some level of normalcy whereby the price will more accurately reflect the true value of the enterprise.

Turning to our plans for the fourth quarter and 2009 -- our focus is on more of the same. First, continue on improving the operational and financial performance of our delivery platform; second, ramping the US and Philippine sites; third, rebuilding our sales and marketing operations; fourth, cautiously investing in new site growth in the US and offshore; and five, all while steadily increasing profitability.

Despite the economy, we continue to be optimistic about the overall business and financial outlook for the fourth quarter and 2009. The short-term demand in our market remains strong and our delivery expansion strategy is progressing as planned. As a result, we expect quarterly revenues to continue to grow at low double-digit rates for the next few quarters as our new sites ramp and our clients continue to award us new business.

We also expect gross margins to steadily improve as our new site ramp results in increased utilization. Margins should pick up as the existing site performance continues to improve and as we're able to realize the effect of the improved dollar in our Canadian operation.

As Dave said, we expect SG&A expenses to increase only slightly over the next few quarters as we invest modestly in sales and marketing and IT projects. This should drive operating leverage and result in higher operating income and EPS.

In conclusion, we believe that StarTek has a solid management team, a well-thought-out plan, a solid balance sheet, and is poised for continued growth and steady improvement in profitability. This and a little help from the equity markets should drive shareholder value into 2009.

Thank you. We'll now open it up for questions.

(Operator Instructions)

And your first question comes from the line of Tom Carpenter of Hilliard Lyons. Please proceed.

Good morning, everyone.

Good morning, Tom.

Good morning, Tom.

Larry, I just want to make sure I heard you right. On the revenue growth, did you say low double-digit?

Yes, I did.

Okay. As we look at this quarter's margins and look back a couple of years ago and look forward, dollar has appreciated between 25% and 30% versus the Canadian currency since mid or late July. The last time we saw this exchange rate, we saw it in '05 and '04 you all's margins were in the low 20's. And I realize you guys are fairly active hedging strategies so we won't see improvements right away. But can you help us maybe quantify the impact of sites seasoning over the next six to nine months? And also, more importantly, help us quantify the FX changes and what that will mean for '09?

Sure, Tom, this is Dave.

Yes, your first point about kind of looking back and looking at what the overall margins were when the exchange rate was kind of at much higher levels, I think you have to take into consideration the mix of business then, the mix of business now, which is a lot different, and there's been a significant amount of wage inflation in Canada since that time. And so, I think it's a little bit of apples and oranges to try to compare the two. But we clearly do think that the appreciation in the dollar -- US dollar against Canadian, is going to be a significant help.

With respect to the remainder of this -- well, with respect to this quarter and the remainder of 2008, you're correct that we will not see a lot of pickup in terms of the improved FX rate and I think our effective rate was roughly 1.02 this quarter, and we expect to be in the 1.03 to 1.05 range in Q4 of '08.

As we go into '09, we did have some hedges in place prior to the run-up for part of the first quarter of '09. So I, just kind of ballpark, I would anticipate about at least a 10-point improvement in the first quarter of 2009 and getting better to maybe 17, 18 points off of the current level in Q2 and beyond, based upon some things that we've done to kind of lock in the favorable rates.

Part of the challenge, as you know, is knowing how much expense you're actually going to have and knowing how much hedge going forward. So we're pretty conservative in our forecast of that expense and we take that number and basically hedge about 85% of what we think we're going to expend.

So, the ultimate exchange rate that we realize depends on combination of the hedges that we've put in place and also just the spot rate on the piece of our expense that ultimately ends up being unhedged.

So, long-winded answer, and I hope I answered your question.

Yes. Just for everybody in the call, it's clear to me but I want to make sure that it's crystal clear, so when you said 1.03 to 1.05 in the fourth quarter, when you say a 10-point improvement, you're not necessarily talking about margins per se, you're talking about in the current --

Correct. Points of -- in the exchange rate.

Exactly, okay. That is good.

And also, can you help us out on the sites (inaudible) Victoria -- the Victoria one should be getting fairly close towards -- close to its run rate, maybe another quarter or two from Mansfield, but can you help us out with that as well, those -- the new sites?

Yes, of three sites we launched, Victoria is the first, then Mansfield and Jonesboro. The reality is that Mansfield and Jonesboro are ramping very nicely and should be at near capacity by yearend. Victoria is about half-full and we've had some operational difficulty there, some recruiting difficulties, but -- so it's probably lagging about three to six months as far as filling it up. But we've got high hopes that that will along as well.

Okay. You talked about one of the other ways you guys can improve margins next year is, you know, more cautious with your site openings. I think -- how many did you say you were going to add in the Philippines in the fourth quarter? Was it 250 to 280 or is that the first quarter?

No, that's the first quarter. We'll add another 200 on top of what we have today in the first quarter, and then we have prospects, hopefully we'll continue to add both in the first and second quarters, but it's not closed business yet, not committed.

Right. But for the most part, the infrastructure has already been committed there, right? We won't --

Yes.

Okay. When you're talking about Latin America and maybe another site in the United States, what type -- what number of seats are you guys thinking about?

If we do something in Latin America, it would be a lot smaller, probably in the 200 to 400 range.

Okay.

If we did another site in the US, it would be our traditional 500 seats range.

Again, this is -- we're just -- we're building a plan, it's going to be a cautious plan. If for some reason we see the markets continuing to pick up and we can do more, we'll do more. But I think in general, our philosophy, even despite an economic issue, the economy issue, we just think it's time to take a breath and start reaping some of the profits from our infrastructure. And we still have utilization; we still have plenty of seats to fill.

Yes, that would be my vote.

Yes. I think that's everybody's vote around this table, so.

Okay. Can you -- so you guys are winning new business with existing clients. How much did your revenue grow year-over-year with AT&T and T-Mobile?

Yes, AT&T on a combined basis, the revenue went from 72% in the third quarter of 2007 to 83% in the third quarter of 2008. So, AT&T went from 49% to 56%, T-Mobile went from 23% to 26%.

On a percentage basis, so you can go crank the dollars.

I think I can do that.

And one last question, I'll jump back into queue. Give us an idea of the sales cycle on new business and what you're seeing out there. I think it's been -- you said you might have had -- you're doing a small trial with a cable company --

Right.

-- talk about if there's a wage pressure out there, companies are more cautious for outsourcing today because it's an uncertain economic environment for them?

I think, again, in the space that we're seeing, we're not seeing price pressure. We're actually surprised, but -- and then that could come in the future. But at this point the deals that we're seeing are more about -- every deal that we're looking at is about people who are growing and therefore need another vendor to add to their mix or they're unhappy with the current vendor. And when -- even when they do switch, they say, "I'll give you 100 seats. Prove yourself and then I'll give you a lot more."

So it has been and continues to be hard to break in to these new accounts unless they are looking to add a vendor or two because they have pretty significant demand. And that's what we're seeing in the cable side, that's what we're seeing in the wireless side.

Relative to offshore, we're still seeing a reluctance to go offshore even though there's experimentation going on with our clients and then there's 100 seats, 200 seats, 300 seats going offshore. And we think the economy will accelerate that in '09.

Your offshore, I think you might have mentioned in one of those prior calls, you had roughly, what is it, about 500-seat commitment from existing clients?

No. We currently have about 300 seats committed.

Okay.

And then we're working with existing clients and some new clients to accelerate that fill-up. But again, I think in my comments I said that, hopefully, that we'll it get it to profitability levels in Q2 of next year.

Okay, great. Thank you.

Thanks.

Thanks, Tom.

Your next question comes from the line of Tobey Sommer of SunTrust. Please proceed.

Hi, this is Frank in for Tobey. Can you hear me?

Yes, we can.

Hey, Frank, yes.

Hi. I wanted to ask a little bit about use of cash. You've generated a decent amount of cash flow this quarter and as your CapEx comes down a little bit. What are you thinking in terms of your use of cash in terms of either buybacks or just keeping that on the balance sheet or looking for possible other opportunities?

Sure. Yes, this is Dave.

We do have the authority to purchase shares back. We're balancing that choice and that option with more strategic uses of the cash going forward. I will tell you that the cash balance that we had this quarter, receivables were very low, payables were high. So we're cautious with our existing cash and investment balance in terms of how we utilize that cash going forward. But the focus, as Larry mentioned in his remarks, is on generating cash flow from operations and starting to build cash up.

And one, I think it's a good time to have some reserves. Two is we believe that, both in the second half of '09 and as we look at '010, that we'll have to go back on spending some CapEx on building facilities, probably offshore. So we're really not all that anxious to take the newly-generated cash and go back and buy shares. But we've had an ongoing debate at the Board level to determine if and when we should do that. So at this point, not.

Okay, great. And you mentioned accounts receivables. In looking at those accounts receivables, are you seeing any trends or changes in that?

Not really. As you know, with AT&T and T-Mobile being a big chunk of the business and obviously very stable, very credit-worthy companies, there's absolutely no issue with the flexibility of receivables, but we do see experience swings in terms of just getting big lump sums of cash in from large invoices from those firms.

So -- and I think you've traditionally seen that, if you go back and look historically at our accounts receivable balance on a quarter-end basis. So we were fortunate this quarter that we did get a fair amount of cash in right at the end of September, and the receivable balance was relatively low.

Okay, great. And turning to the hiring/recruiting environment, you mentioned difficulty in a couple of areas there. Can you give us some more color in general on the environment that you see out there?

Yes, I think in general over the past several years, the whole industry has seen wage inflation given the general economic conditions. In Canada it's even worse because of the kind of energy boom that they've been living through. And particularly in certain locations in Canada, we've seen wage inflation, you know, higher levels than the US.

Having said that, it's possible that this economic downturn will help us in that sense. So we are basically selectively raising wages where we need to meet the market demand. But it still is -- we are tapping in to the low end of the marketplace, very cost-sensitive business, and therefore you have to really sharpen your pencil relative to how you recruit, making sure that you are very selective about who you recruit at those dollar levels, and then work hard to overcome the retention, you know, the attrition levels, which in this industry, everyone is hitting that 100% or better.

So it's a Swiss clock, I call it, where constantly you have to be doing your best efforts to recruit and retain agents in order to keep the FTE count up.

Have you seen any change in those attrition levels lately?

Yes, our attrition levels are improving, mostly because of our efforts which are broad and many. And again, start with the selection process to make sure you get better-quality agents and make, secondly, making sure you're doing everything in the center to make the job fun, make the environment conducive to staying around, and then looking at career pathing and leadership development, all kinds of things that drive that. So, yes, we've been improving in that area.

Okay, great. And my last question, maybe -- last quarter you talked a little bit about some prospects that have the kind of mentality of delaying projects and you were seeing kind of the pipeline there being delayed a little. Could you talk a little bit about the mentality of your conversations with customers and their thoughts about delay?

I think we're not seeing an acceleration in delay. It is just a fact of life that when people are making these big decisions to change vendors or to add vendors, they are very cautious about it. So, therefore -- and typically at this time of the year, they're trying to catch an '09 budget at the time to be able to make that transition. So we're constantly seeing delays and in fact this quarter we saw a couple of decisions that we thought would have been made by now, delayed, you know, a month, a month-and-a-half.

So I don't think it's accelerating and I don't think there's a trend, even though we're looking for it, because we know there's a trend in the economy. But to really be honest with you, we haven't seen any trends relative to delays, price increases, or anything that could hurt us in the future. But we're keenly watching. Because if it continues the way it is, we expect that to start happening.

Okay, great. Thank you very much.

Thanks.

Your next question comes from the line of Arnie Ursaner of CJS Securities. Please proceed.

Hi, good morning. This is actually [Tom Eastbourne] for Arnie Ursaner.

Good morning.

Most of my questions have been answered, so I just have one quick one.

Yes.

Excluding currency, have you guys seen anything that would make you change your expectations for margin potential in the Philippines?

Not really. I mean I think there is a steady wage inflation going on there at a pretty low level, which had very small impact on gross margins. But I think as we said on our last call, we expect the lowest gross margins in Canada, decent margins from the US, and much higher margins from the Philippines. So as our mix changes, it should be very good for us.

Okay. Thank you very much.

Yes.

(Operator Instructions)

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

Hey, guys, good morning.

Hi, Melissa.

Hi, Melissa.

So, I was looking at the T-Mobile revenue and it looks like it came down a bit sequentially. What's the reason for that decline?

The recent site closure.

Okay. So that was T-Mobile. Okay.

Yes. And I think it's worth noting that net of that, we actually had a little bit of growth, so.

Okay. And then, in terms of seasonality, what do you typically see in the fourth quarter and what would you expect or how do you expect that to play out this year given everything that's going on?

First of all, everything going on, we think we'll have zero impact on the fourth quarter, at least based on the current head count projection that -- and schedules that our clients are giving us. But in the fourth quarter you typically have a seasonal rush as people buy new cell phones in the holiday season.

Will it be as high as it was last year? I don't know. But we're ramping in almost every center we can, with expectations of higher demand.

And I think the best way to think about it is just go back and look at the last couple of years you can see kind of a slight uptick. It's not a huge seasonal, it's not like we're in the retail business. But when people do buy more cell phones, they do have more activations and they do have more problems in the first three or four weeks of operation. So we get a slight uptick in that sense.

Yes, and it's a little bit of balance between the wireless activity which is really driven by the retail demand and then our offline work which is actually a little bit slower in November and December just because of the holidays and time off in those months, so.

That's true.

So it is a net uptick, but there is a balance.

Okay. And how much of your AT&T revenue is related to the iPhone?

We don't have centers who are dedicated to the iPhone. Anybody who's taking a call from AT&T Mobility, which is, I don't know, a pretty two-thirds-plus significant chunk of the AT&T, do handle the iPhone. So as the volume goes up for the iPhone, they just view it as another subscriber. And we do handle problems with the iPhone or activations with the iPhone, but it's not -- we don't view it as number of seats that are dealing with the iPhone. It's kind of the whole account.

And recently, T-Mobile just sent out the new phone that's based on the Google platform. So I think in general you can say our wireless business, which is around two-thirds of the business, continues to see an uptick in call volume based on these new, more sophisticated phones that are obviously more difficult and require more support.

Okay, great. And then on the sites that you have ramping now, the three, Victoria, Mansfield, and Jonesboro, I think you said that Victoria was half-full, and how -- what stage are Mansfield and Jonesboro at, and what revenue run rate do you expect once all three of them become fully ramped up?

I think that's a little more detailed than we're going to give, but I'll give you a couple of data points to work on.

One, they're 500-seat centers, and the Mansfield and Jonesboro by yearend or the first quarter at the latest should be fully ramped. And the Victoria site, at this point, we can't give you an estimate, but it's ramping nicely.

Okay. And then --

Yes, I think it's fair to say that Mansfield is probably ramped a little bit more quickly just given the lines of business that are in there and it's just taking a little bit longer on the Victoria side. But I would say we're a little bit ahead of schedule in Mansfield, a little bit behind schedule on Victoria, and Jonesboro appears to be ramping at a very nice pace.

Okay, great. And then, finally, and then I can ask the rest of my questions offline, but, what tax impact do you expect the Philippines to have in '09? Is there any tax differential or tax credits that could bring the tax rate down?

No, it won't be a material difference. As you know, you have to -- even -- you really don't recognize tax liability based upon the margins that you -- the gross margins, it's done on a cost-plus basis for transfer pricing reasons. So you're really looking at income in the Philippines of anywhere from 6% to 10% of your revenues, your cost plus about 6% to 10%.

So in the grand scheme of things, it will not produce that big a tax savings, though we do, because of our PEZA status in our existing site, we will get a tax holiday and we'll likely get an extended tax holiday for giving the amount of CapEx investment that we intend to spend there. But in the short run, I don't see it being having a meaningful impact in our overall position. As our Philippines presence grows and perhaps we have a second site, then I think it starts to get a little bit more meaningful.

I think the way to size that up is just look at our scorecard, take the gross margin percentage times the revenue gross profit dollars in the Philippines, and it would be pretty pro-rata relative to the total income of the company. So as you can see, it's pretty small now and it's pretty small even in the total number of sites that we have today. So, probably not until '010 or '011 where it would really show up with something meaningful.

Okay, great. Thanks very much.

(Operator Instructions)

And there are no further questions at this time. I would like to turn the call back over to Mr. Larry Jones for closing remarks.

Well, thank you very much, and we'll talk to you next quarter.

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