Startek Inc (SRT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter StarTek earnings conference call. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Julie Pierce, Director of SEC reporting. Please proceed.

Good morning, everyone, and thanks for calling in. I am Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations, and it is my pleasure to welcome everyone to StarTek's fourth-quarter 2009 earnings call.

I am 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 section of our website. In addition, we are using a PowerPoint presentation to assist in communicating our message to you and to provide after-call documentation. The presentation is available on our website next to the webcast link.

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 2008 Form 10-K and subsequent 10-Q 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 measurement. These reconciliations can be found in the appendix of the earnings call PowerPoint presentation and on the investor 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 good morning, everyone. As Julie mentioned, you can download the presentation that we'll be using today from our website. I encourage you to do so and follow along.

Starting on page 4 of that presentation, I'll recap the financial and operating highlights of the fourth quarter. Quarterly revenues decreased 1.1% from the prior year and was flat from the prior quarter. Fourth-quarter revenues were lower than expected due to lower call volumes from our second-largest client and some of our telco clients, a factor that we expect to continue into 2010.

Gross margins for the quarter were 16.2%, up considerably from last year but down sequentially due to increased training costs and the impact of two holidays during the quarter. Net income for the quarter was $0.9 million or $0.06 per share, which included a tax benefit of $0.6 million or roughly $0.04 a share. Dave will provide more color on the quarterly numbers later in this call.

On page 5 we list some of the client highlights for the quarter. As previously mentioned, fourth-quarter FTE demand was lower than expected. Typically, fourth-quarter volumes are higher than other times in the year due to the holiday buying season. This year, however, we experienced lower client call volumes due to lower product sales and clients taking lower forecasts to reduce costs.

AT&T fourth-quarter revenues were sequentially flat and remained at 63% of our total revenue. Despite the lack of growth in the fourth quarter, we expect AT&T's demand to improve as they continue to move more of their in-house volume to outsourcers and low-end work to the offshore. T-Mobile revenues declined 3% sequentially and declined for the second consecutive quarter due to competitive pressures and lower subscriber rates.

In the telco wireline segment, over the last several quarters we've seen the impact of the softening economy. Customer disconnects continue to rise, resulting in lower call volumes and client pressures to reduce overall costs.

Despite this softening at T-Mobile and the telco sector, the demand for offshore volume is on the rise as clients continue to seek ways to reduce overall customer care costs. At this point, this seems to be in our favor as we capture more offshore programs.

Moving to page 6, we had a number of major accomplishments during the quarter. First, in December, we were awarded three new contracts from our top two clients for roughly 900 seats in the Philippines. All three of these contracts represent incremental business and all three have the opportunity to grow substantially if the initial phases of these programs are successful.

Second, our sales team finished the year by signing a new client in the property and casualty insurance vertical. This is our first client in this vertical that is part of our overall strategy to branch out from our traditional communications sector. This client will launch in the second quarter and grow throughout the year.

Last August we announced the signing of a lease in San Jose, Costa Rica. I'm pleased to report that in the fourth quarter we completed the buildout of that 440-seat center and hired the core management team that is now launching a client program that will ramp throughout the first half of 2010.

Also during the fourth quarter we began our first pilot on our second-generation StarTek@Home platform. This robust @Home technology platform, which took most of 2009 to develop, is now fully deployed and will allow us to scale this business throughout 2010.

Finally, in December, the courts approved the settlement of the shareholder lawsuit that has been an overhang to the Company for several years now.

And while the fourth quarter was successful and busy, January and February have proven to be equally as busy. Page 7 lists some of these recent events. In January we signed a new lease for a 2,100-seat facility in the Philippines. Located in Ortigas, just 20 minutes from our Makati facility, this facility will accommodate two of the three new programs I mentioned earlier and will launch in the second quarter.

The other program will be located in our Makati facility and is launching as we speak. We've decided to build such a large facility, twice the size of our initial site, because of the offshore demand that we are seeing both from our existing clients as well as new prospects.

Recently we announced the closing of three of our existing sites, one in Canada and two in the US. Two of these closures are part of our site optimization program that we've been executing over the past several years. While these will negatively impact short-term revenue growth, they will positively impact margins and utilization.

The third site, in Victoria, was closed due to a termination of an existing client program at that site. Our intention is to either find a new client to fill the site or attempt to sublease the facility.

Finally, as I mentioned earlier, we launched our first StarTek@Home pilot in December. Momentum in that program continued as we launched two new programs in January. These three pilot programs represent over 50 FTE.

In summary, while we're disappointed in the revenue and margins reported in the quarter, we are very pleased with the progress we've made on securing new business, expanding our offshore platform and on executing on many of our other strategic initiatives.

Let me now turn to page 8 and recap the full-year results for 2009. If I reflect on the state of the Company as we enter 2009 and where we are today, it is clear that we're exiting 2009 a more healthy and stable enterprise. In 2009 we stated that we would focus on three primary goals -- continued growth and restored profitability, expanding our delivery platform and executing on a number of key strategic initiatives. Let me recap 2009 by focusing on these three areas.

We ended 2009 with $289 million of revenue, 6% growth over 2008. While this was less than our double-digit growth target stated at the beginning of the year, it is a significant accomplishment in an industry where many of our competitors are reporting flat or negative growth rates. Also note that the closure of several sites in 2008 and in early 2009, intended to improve margins, also negatively impacted our growth rate.

Much of the growth that we did realize was by winning new programs from existing clients and through new sales. In 2009 we signed five new client contracts that will provide over $12 million in new revenue in 2010. This level of sales has not been seen for many years.

At the same time we significantly improved our profitability, ending 2009 with $4.6 million of net income. Gross margins improved from 13% in 2008 to 17% in 2009, steadily marching to our stated goal of 20%. EPS also improved nicely to $0.39 per share versus a net loss of $0.67 per share in 2008.

Finally, we ended the year with $20 million of cash and equivalents, up from $18 million in 2008. This was accomplished while still investing $15 million in CapEx and reducing our debt by $7 million, ending the year with virtually no outstanding debt.

Turning to page 9, during the year we also have made significant progress in expanding and optimizing our delivery platform. On this page we highlight the accomplishments, which include improved site utilization, reducing our Canadian footprint, ramping our Makati facility, building a new Costa Rica facility and launching our second-generation @Home platform.

Another key platform initiative was to expand our technology service offerings. In addition to expanding our internal VoIP and @Home platform, in 2009 we delivered our first client installation of our hosted IT infrastructure, encompassing IBR, virtual queuing and voiceover IP services.

Turning to page 10, during 2009 we accomplished a number of strategic programs as well, intended to provide us with the process, systems and management infrastructure to scale the Company in 2010 and beyond. These programs included the implementation of a new ERP and HRIS system, an offshore shared services organization that has allowed us to offshore operational and corporate functions to reduce overhead expense, a process improvement effort to document and standardize corporate and field processes, and a number of leadership, development, and management upgrade programs intended to give us the management depth and breadth to scale the Company.

So yes, 2009 was a very good year, and all of these accomplishments will pave the way for an even more successful 2010. But before I talk about that, I'd like Dave to cover the financial results in a little more detail.

Thanks, Larry, and thanks to everyone for calling in. As Larry mentioned, our results for the quarter were a bit disappointing, both from a revenue and earnings perspective. Revenue and gross margin were both lower than expected due to a slow holiday season for clients, which translated into lower call volumes and a higher holiday wage cost for us. For the year, however, we are pleased with the progress made, growing the business, expanding margins, returning to healthy profitability and, most importantly, positioning the business for continued improvement on those fronts in 2010 and beyond.

So moving on to the detailed online on page 10 of the presentation, revenue for the fourth quarter totaled $72.5 million, flat compared to last quarter and down a little over 1% compared to the fourth quarter of 2008. Gross margin was 16.2%, a 240-basis point decline compared to the third quarter but up 530 basis points compared to Q4 of 2008.

SG&A totaled $11.5 million or 15.9% of revenue, an increase of $400,000 compared to last quarter and up $1.2 million from the year-ago quarter. Operating income for the quarter totaled $200,000 compared to $2.4 million last quarter and a loss of $2.3 million in the fourth quarter of 2008.

Earnings per share for the quarter totaled $0.06. And as Larry mentioned, that was aided by a tax credit that contributed $0.04 per share.

The quarter did not meet our expectations and slide 13 provides a bridge from Q3 that I think helps explain several of the factors that caused revenue to be flat and gross margin to slip. The bright spot for the quarter was the continued ramp in our Makati site, which sequentially added $1.4 million in revenue and $800,000 in gross profit, and as illustrated on the slide 16 financial scorecard our offshore segment posted gross margin of 22%.

This improvement was offset by lower call volumes from T-Mobile and from other telco clients that have significant land line business. These two factors translated into a sequential revenue decline of $1.2 million and a $600,000 drop in gross profit.

The biggest negative surprise in the quarter was the higher-than-expected holiday pay costs. In several locations clients requested that we close on both Thanksgiving and Christmas Day, where in prior years those sites were open for business on those days. This resulted in an increase in holiday pay of approximately $900,000 with no offsetting revenue.

In addition and as expected, we incurred higher than normal training expense of $300,000 associated with the ramp-up of agents after the lifting of the hiring freeze that negatively impacted revenue in the third quarter.

The annual results, outlined on slide 14, highlight what we felt was a good year. Revenue totaled $289 million, an increase of 6.1% compared to 2008. But more important, gross profit increased by over 40% to $49.1 million and gross margin expanded 450 basis points to 17%. SG&A expense grew by $2.4 million, but as a percentage of revenue it decreased to 14.9%.

Net income, excluding the effective impairment and restructuring charges and excluding the results of discontinued operations, grew to $4.6 million in 2009 or $0.31 per share compared to a loss of $4.2 million and $0.29 per share for 2008.

Slide 15 provides good insight into the year-over-year revenue and margin improvement and highlights the positive impact of foreign exchange, site openings and closures, our offshore initiative as well as other operational improvements. The swing in FX contributed $6.4 million in gross profit and 240 basis points of margin.

Our site closures in 2008 and early 2009 combined with the three new US sites opened in the last year added revenue of $3.1 million but incrementally added $8.1 million to gross profit and 290 basis points of gross margin. Our Philippine offshore investment yielded incremental revenue of $11.9 million and $900,000 in gross profit.

In all, revenue grew by $16.7 million, gross profit grew by $15.1 million and margins expanded by 450 basis points to 17%. We are obviously pleased with this progress and believe that we have established a foundation for a solid delivery platform that will sustain revenue growth and allow us to achieve our long-term margin targets.

We reminded in the release this morning that in 2010 our site optimization efforts are continuing with the permanent closing of our Thunder Bay and Laramie sites and the temporary closure of Victoria. In total, these sites contributed revenue of approximately $4 million in the fourth quarter but generated negative gross profit of approximately $800,000. And on a combined seat count of over 1,100 agent seats, utilization was only 33% in these three locations.

These closures will have a lingering gross profit drag in the first quarter but should contribute positively to gross profit after that point.

At the same time we've accelerated our offshore expansion effort with the launch of Costa Rica and our second Philippine site that will accommodate over 2,100 agents when fully ramped. This launch effort will also have a negative gross margin impact in the first half of the year, but we expect our 1,100-seat Makati site to be full by the end of Q1, and by year end we expect our Costa Rica and Ortigas locations to be at least 50% utilized.

Putting it all together, by the end of 2010 our offshore segment will consist of almost 40% of our available seats and roughly one-third of our FTE.

So, while there is short-term financial pain with this accelerated offshore migration effort, it's what our clients are demanding and we believe it's appropriate for the long-term health of the business.

Moving on to the balance sheet and cash flow highlights on slide 17, the balance sheet remained strong at the end of December with cash and investments totaling $20.1 million and no debt, working capital totaled $60.4 million and our current ratio was 3.4 to 1. Cash flow for the year was also strong with EBITDA of $21.9 million or 7.6% of revenue, the highest in three years. CapEx for the year totaled $14.7 million, and depreciation expense totaled $16 million.

Once again, we are not overly pleased with the quarter, but feel very good about the outlook going forward into 2010. And with that, I'll turn the call back over to Larry.

Thank you, Dave. Now I'd like to talk a little bit about the outlook for 2010. On page 19 we've highlighted some of the industry trends that will shape 2010. As I mentioned earlier, we expect to see continued slowdown of demand from our telco clients as they try to keep up with the declining market demand and shift away from traditional phone services to new products and services.

In the wireless sector we expect competition to increase and while continuing to put pressure on second- and third-tier players. This should result in more volume for the first-tier players and less for the others. All players, however, will accelerate their use of outsourcing and migration offshore.

Next, the continued economic and competitive pressure in the overall industry have resulted in more focus on sales, inbound and outbound sales programs and the use of customer care calls to upsell and cross-sell customers new products and services. We believe that we're well positioned to meet those demands.

Finally, there's an ever-increasing need for technology solutions like IVR, Web, e-mail and chat and social networks to reduce the labor required to service customers. We will continue to develop and deploy new services to meet those client needs.

To meet the demands of these changing industry dynamics, our 2010 plan will focus on the strategy that we set forth two years ago to grow our revenues, improve profitability, expand our platform and make strategic investments that will allow us to grow and remain competitive.

On page 20 we highlight our financial objectives for 2010. They include, first, growing revenues 4% to 6% over 2009. This will be accomplished through continued selling of new logos and winning new programs from our embedded base. Our sales efforts will continue to focus on the cable industry, health care and insurance.

Second, we'll continue to focus on our 20% gross margin target by improving utilization, reducing Canadian exposure and by increasing the percentage of higher-margin offshore revenue. Third, we'll focus on SG&A cost containment through day-to-day management of expenses and leveraging our offshore shared services operation. Finally, through all of these efforts we expect to grow EPS 20% to 30% over 2009.

While financial results are important, we continue to execute on our strategic priorities as well. Page 21 highlights our 2010 operational and strategic priorities. First and foremost, we'll continue to deliver on the quality and service level promise that keeps our clients coming back for more. Our reputation for quality is our most critical differentiator that allows us to retain existing clients and win new business.

Second, we will continue to optimize our existing delivery platform while expanding offshore and grow StarTek@Home in the US to over 250 FTEs by year end.

Third, we will continue to invest in new technology solutions for both internal use and for new service offerings for our client. And finally, we will step up our M&A initiatives to seek out accretive and low-risk acquisitions that can accelerate our growth, decrease our client concentration and diversify our market coverage and geographic coverage.

In closing, on page 22, what you should have heard today is that while there is a noticeable softening in demand in certain sectors of our business we are bullish on the future offshore and new sales opportunities ahead of us in 2010. As Dave mentioned, while the first-half revenue and margins will be dampened by recent site closures and ramping of offshore programs, we expect the second half of 2010 to be strong.

To accomplish this, the senior team and myself are keenly focused on serving and protecting our existing clients by adding new business, by successfully ramping the recently acquired offshore programs and improving margins. If we stay focused on these items, I'm convinced 2010 will be another great year for StarTek. Thank you.

And with that, Dave and I would now like to open it up for questions.

(Operator instructions) Arnie Ursaner, CJS Securities.

Quick question to ask you, starting with your FTEs in the US, where I'm trying to get a better sense of the training expenses and the startup expenses related back to AT&T. In Q3 US was 4,344; by year end, it was 4,017. You had lost roughly 300 or so FTEs for that specific account, and one of the training expense issues were you were going to be hiring them back in Q3, Q4 and Q1, but yet it doesn't appear to be happening mathematically. Could you expand a little bit on that and perhaps freshen those numbers up for us?

Sure. With respect to that issue specifically, revenue was flat for AT&T overall and FTE was flat overall for that account. So we are trending back to get to our, I'll say, Q2 of 2009 levels within that account. What you're seeing, though, is declines in other accounts from an FTE perspective, and I think we alluded to those on the call as being our telco clients and also T-Mobile.

In short, the ramp back up is progressing as we had planned and we had a slight incremental increase in Q4.

In Q3 you had mentioned it was -- because of the fact you were not incurring training expenses in Q3, it was 75 basis points positive to your overall margin. It was expected to be 100 basis points negative in Q4. Did, in fact, that occur in Q4, or is the negative hit on margin still in front of us in the first half of 2010?

Specific to that issue, I think it's behind us and the drop in Q4 was more than the 100 basis points that we were anticipating going into the quarter. The impact of the incremental training costs came in about as we expected.

But the surprise, as I mentioned in my remarks, really had more to do with slowing demand within other clients during what is normally a strong holiday season and just the incremental holiday wage costs. We also had some insurance costs that hit us a little bit higher in the quarter. So that kind of bridges that gap.

If I could expand a little on two of the growth initiatives that are part of your plans for 2010; you mentioned insurance, which will launch in Q2, and grow sharply during the year. And the other one I want to focus on is your @Home pilot and the expansion of that.

Can you give us a sense or feel for the costs you are likely to incur in both of these growth initiatives and the number of seats you hope to have in the insurance vertical? And do you hope or believe it might reach a disclosable client level by the end of the year?

So, the new client is not an elephant, as we would call them. I think it's a moderate-sized customer that will grow and not be disclosable. The insurance industry itself, I think, will take multiple years to ramp. And, as we've talked about before, when you enter a new vertical you need to get a reference account. And this will be a great reference account and I think it will allow us to continue to sell into that marketplace.

Second question relates to going from 50 FTEs on the @Home pilot to 250. Is the technology investment behind you? And what costs do you expect to incur as you ramp that up?

The beauty of @Home is that the CapEx cost is one-third to less of that for building a center. So the technology is in place to support that level of infrastructure. There's some marginal CapEx that needs to be deployed for servers and things. But remember, in the @Home environment the employees provide their own PC, their own Internet connection, and what is required for scaling is training.

So you will see the typical training drag as we ramp those because we pay them for the time that they are in training. But all of these programs initially are new programs, which means that the client will share in that training expense. So net-net, I think not a big drag on the business as we deploy at home.

Final question, if I can. You have shut some facilities, and obviously you have some well-trained representatives at some of the facilities you're shutting. Are any of them being targeted for the @Home?

It's funny you should ask. As we shut down sites, we actually go to the clients and ask if we can move some of those people at home, even if it's on an interim basis. And in our Laramie shutdown, we in fact did that for a client there. So it does allow us to buffer some of the impact of a closure on an agent level.

On a management level, we do try to redeploy where we can, relocate people to other centers or to other programs that we have.

Dave Koning, Baird.

First of all, I just wanted to walk through the seat count going through 2010. It sounds like you exited the offshore market with 613 seats. But it seems like you could be close to 3,000 by the end of 2010. Is that reasonable math?

Yes. The way to think about the available agent seats -- we've got 1,100 in Makati, 2,100 in Ortigas, which is the second Philippine location, and then roughly 430 in Costa Rica. So call it 3,600 seats, which will represent by the end of 2010 about 40% of our total available seats. And we expect Makati to be fully ramped, meaning 100% utilized, on the 1,100. And then Ortigas and Costa Rica we expect to be at least 50% utilized by year end.

So at the end of the day I think your math is pretty close, but well north of 2,000 FTE on agent seats of about 3,600.

US and Canada, should we expect both of those -- I would imagine Canada more than the US, but both to decline during 2010?

On the existing -- so the closure of the site in Thunder Bay will have a negative impact on the Canadian seat count as well as the revenues there, per our plan. But the sites that are there are pretty well utilized, and I think our forecast is for utilization to increase slightly over the year.

Yes; the thing to note about Thunder Bay is it was about a 360-seat site, but we only had 110 FTE. So it was way underutilized, was contributing or was generating negative gross margin. So the closure of Thunder Bay actually helped us a little bit in Canada from a margin perspective to offset what is an FX headwind, because I mentioned in my remarks that FX helped us by a little over $6 million in 2009 and it has gone the other way in 2010.

So overall, as Larry mentioned, utilization should tick up a little bit. Margins should settle in around 10%, 12% for Canada for the year with Thunder Bay going away.

And then you touched on, really, my other question. You had Canada, gross margin of 10% to 12%. I would imagine that US margins would hold in pretty close to '09 levels. And then really where can the offshore margins go?

They were huge margins this quarter, 22%. And it feels like they can actually go higher as you become more utilized. But maybe where should we think about gross margin going in offshore?

Yes; I think your observation is correct, and our target for all of the offshore segment is to achieve at least 30% gross profit, which again if we execute on the opportunities that are ahead of us for the programs that have been committed, we think we can achieve that by the end of the year.

And then, I think, in thinking about margins in the US, 20% continues to be our target. While brick-and-mortar will be flat to down in terms of seats, we'll augment that with @Home seats, which typically have higher margins associated with that platform.

So again, 20% we think is achievable in the US; Canada, 10% to 12%; and then offshore, 30%, 30%-plus.

My last question, just on guidance, the two things -- the gross margin at 20% -- that's not a full-year number, that's just something you expect to get to at some point and then EPS growth, 20% to 30% off a $0.31 number. Are both of those right?

Yes, that's fair.

Howard Smith, First Analysis.

On the top-line guidance of 4% to 6% growth, given the hit you will take at the end of Q1 and into Q2 with closing these centers, it implies, as you said, kind of a weak first-half and then very strong growth in the second half. Is that based on ramping your insurance, customer and other things you have signed or is that guidance based a lot on the pipeline that you expect to close and start to implement in the second half?

The majority of that guidance is really just execution of what we are suggesting is in backlog as opposed to blue sky pipeline. The insurance piece, as Larry mentioned, is not really a material piece of business in terms of its size.

It's significant strategically, but your observation is correct, that the first half will be challenged from a top-line perspective. But if we execute on the client programs that are committed to us, then I think we exit the year pretty healthy.

And then on the @Home agent initiative, I think previously you had stated a target of exiting the year at around 500 seats on that program. And so it looks like it's scaled back a little bit in terms of expectations. I'm curious if that's correct and, if so, what's driving that.

I think, as we've gotten into it more, there is a reluctance on the side of the market to jump feet-first into the @Home market, so a lot of clients are piloting and starting with 25s and 50s. Of the three pilots that we have going the performance has been stellar, and the results are clearly in line with what the expectations were, which is better agents at a lower cost, lower attrition and higher quality of service.

But what we've seen clients do is say, okay, so I'll give you X amount of seats, show me, and then ramp beyond that. So we are being cautious about how the current three programs are going to ramp beyond 50. Each one of them has potential to do more, and we've got a pipeline of clients who are slow to move relative to pulling the trigger to sign contracts.

And my last question is on a little bit kind of the competitive environment out there. Sometimes in verticals when the vertical slows down there's excess capacity of specialists in that industry and it causes some irrational or difficult pricing discussions. I'm curious if you are seeing that, particularly in the telco vertical.

Are not, right now. We've got pretty secure contracts. We've got one medium-sized contract that we are renegotiating and there is a little bit of price pressure, but most of it is around how do you become more efficient in what you're doing. So I think the competitive environment is such that there isn't a feeding frenzy like it was in the telco market in 2000-2001, but just a continued pressure on the client to get more for less.

But, again, I would not say that we have any client pushing us for 5% or 10% price decline.

Tom Carpenter, Hilliard Lyons.

It sounds like you guys have had a pretty busy couple of months.

Well, we've got the busiest just ahead of us. What do you mean?

As we look at the fourth quarter and SG&A, it was a little higher than it had been in the preceding five or six quarters. When we are looking out at 2010, does it -- you guys have so many moving parts, I guess the first -- actually, all the quarters of this year. Do you see that dropping to maybe how it was in the second half of '08, or is it going to stay in the mid-15%s?

Our target going forward is to be able to achieve some operating leverage and get SG&A as a percentage down to the 14% -- 13%, 14% level. I would also say that in this quarter we got a little bit ahead of ourselves in terms of our spending and made some adjustments at the end of 2009 to scale that back a little bit.

Part of the spending was payroll related in areas like our business process improvement group, our shared services platform, which has some near-term costs but obviously is designed to generate savings longer-term. So that was, I think, part of the reason for the increase and I'll say a good reason for increase. But at the same time, we recognize the need to balance that with revenue and gross profit.

So I don't mean to be elusive about my answer, but I think you should expect in the first half, given that revenue and GP is going to be challenged, that we are going to be very tight-fisted with respect to SG&A spending. And you should see the dollars come down sequentially in Q1 and in Q2.

Cash has been fairly steady over the past year, year-and-a-half. As you guys have paid down debt, you did do a fair amount of investments in the fourth quarter. When you look out at 2011, with openings -- and I know it's a lot cheaper offshore than in the US -- do you see cash growing, or is it going to be fairly even with the cash that you generate [that's used]?

Yes, it is going to be a big CapEx year, given the Ortigas site, which is four times the size of a normal North American location and double the size of what we've done previously in the Philippines. So that is our big investment in the year, and we expect to limit the CapEx around that initiative to between $12 million and $13 million. And other CapEx-related items we expect to limit to $7 million or $8 million, such that the total is in the $20 million range.

So we do expect a small increase in the cash position. I obviously don't envision taking on any debt other than potentially an M&A opportunity. But as revenue increases, we'll see an uptick in receivables likely at the end of the year. But I would expect for the year that cash will be flat to up slightly.

And how -- are payment terms for offshore business similar to the US? I know in a lot of times it's the same clients but I was curious what the terms are like.

Yes; that has been our experience to date. All of the businesses that we have in both the Philippines and Costa Rica are with existing US clients. So the terms are the same.

Larry touched on the demand environment, said it was weak for the tier-two and tier-three in wireless. If you were going to rank the demand environment for wireline, wireless, cable and some of your new products, like voice over Internet protocol, could you maybe rank those in order from where there's the strongest demand to the least?

I'd say the tier-one wireless and all the cable, I would say, are the probably strongest demand. The telco I would put at the bottom, relative to competitive pressures. And then the new verticals that we are pushing at we think are delivering pretty well, so we put those in kind of number two growth opportunities, both the healthcare and the insurance.

And as we look out to later this year and 2011 and 2012, do you see similar trends as you guys become a 50%-plus offshore, or do you see the US sites coming back into vogue?

Oh, I think they're still in vogue. A lot of our sales initiatives and incremental program -- we took a -- look at 2009. We took a number of new programs in the US in our existing base. So we think they are still in vogue. What's going offshore is the lower-end customer or the lower-end type of work -- you know, initiating a phone service or something of that nature.

So when we say it's migrating, there's a pretty big shift in the pie that clients are looking at onshore versus offshore. But there's still a huge pie of onshore, and that demand still seems to be strong. What we are trying to do is push that demand to the at-home environment and into the unutilized sites that we have today, such that we don't have to build new US sites for, hopefully, a couple of years so we can use all of that capital to deploy to the offshore arena.

So not a big boom in the US, but clearly continued growth in the US.

I guess, with Petersburg, you guys have got a customer. You closed it, you restarted it, I think. Was Victoria a new one? And then you (inaudible) some issues with a customer that -- I don't know if it's -- I know in Canada it seemed like it was what was going on with the labor pool in that area. They had big oil and gas. But in the US I guess it's a combination of the program is very important and also site selection.

Yes. I would say Victoria you should just take as a program that -- it wasn't a service-level issue. It was just the program got consolidated into another place. And it wasn't a huge -- that site wasn't overly utilized as it sat, so it wasn't a labor market issue, it was just a good site that we hoped to redeploy.

(Operator instructions) Arnie Ursaner, CJS Securities. Arnie, your line is open, please proceed.

Maybe not.

(Operator instructions) There are no further questions at this time. This concludes the question-and-answer portion. I would now like to turn the call back over to Larry Jones for closing remarks.

Thank you, everybody, for your time today. We were competing against Tiger Woods, so we are appreciated with all of your capabilities. So thank you for your time and we'll talk to you next quarter, thanks.

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