Startek Inc (SRT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 StarTek earnings conference call. My name is Noellia, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We'll be facilitating 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, Ms. Julie Pierce, Director of SEC Reporting. Please proceed.

Thanks, Noellia. Good morning, everyone, and thanks for calling in. I'm Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations. It is my pleasure to welcome everyone to StarTek's second-quarter 2010 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, or you can download a copy from the Investors 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 differ materially from these projections.

StarTek advises all those listening to this call to review our 2009 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 of 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'll now turn the call over to Larry Jones, StarTek's President and CEO.

Thank you, Julie. Good morning, everyone, and I hope you're having a wonderful summer and staying cool in this unusual heat wave. As Julie mentioned, please feel free to download the presentation from our website and follow along.

The second quarter was a definite improvement over the first quarter. Agent headcount increased to a Company all-time high, and revenue, margins, EBITDA, adjusted EPS, and cash all improved versus the prior quarter.

North America consolidation continues as our offshore operations added nearly 600 FTE, bringing our total offshore headcount to over 1200. All of this is in line with our strategy to rebalance our geographic delivery mix toward higher-margin offshore business.

Over the next 30 minutes, Dave and I will provide you with more detail on these and our accomplishments for the quarter, as well as our outlook for the rest of 2010.

Starting on page 4, we highlight our financial results for the quarter. Revenues of $68 million represented a 7.7% decline from the previous year and a slight increase from the prior quarter. Gross margins improved to 11.3% during the quarter, driven primarily by improvements in our Canadian and offshore operations. As we execute our site optimization efforts in North America and continue to grow and fill our offshore locations, we will continue -- we expect continued improvement in our gross margin.

As in the first quarter, SG&A continued to decline as a result of a number of cost reduction programs implemented over the past three quarters.

As a result of higher gross margins and lower SG&A, our operating loss decreased slightly to $3.2 million and EBITDA improved to $2.3 million. All in, we reported a net loss of $5.2 million and an EPS loss of $0.35. These losses were impacted by impairment, restructuring, and tax charges that Dave will walk you through in some detail. Adjusted for the tax allowance, our EPS loss would have been $0.07.

Cash at the end of the quarter was $22 million, down from $27 million in the prior quarter, due to slightly higher receivables and continued capital expenditures associated with our offshore buildout.

On page 5 are our client and market highlights for the quarter. Revenue from our largest client, AT&T, increased 3% from the prior quarter and represented 69% of our total revenue.

During the quarter, we were given notice that the majority of our wireline program will be migrated to India with another vendor. This represents the loss of approximately 260 FTE and will be transitioned over the next nine months.

While we were disappointed in the loss of this program, we expect to more than offset the loss by other FTE gains in the wireless programs that we manage for AT&T.

Revenues for T-Mobile, our second largest client, declined 8% sequentially due to as site closure in the first quarter, offset by growing programs in the Philippines. We expect continued downward pressure on North America demand, offset by continued expansion of T-Mobile's offshore programs.

Our largest industry sector, wireless communications, second-quarter revenues was up slightly from the prior period. Although the wireless segment has represented our largest growth sector in the past, we expect lower growth rates going forward due to lower overall industry growth.

The wireline sector continues to struggle as disconnect rates continue to rise. In the second quarter, revenues from this sector declined 12% sequentially.

Our smallest, the most promising sector, are the large cable companies where our revenues grew 35% over the prior quarter.

Moving to page 6, I will highlight some of the operational accomplishments for the quarter. Big news for the quarter was the appointment of Chad Carlson as EVP and COO, who is now responsible for all of the global operations of the Company. Reporting to him will be all country and site management, account managers, as well as cross-functional operational teams for quality training, resource planning and implementation. We're quite happy to have attracted such an experienced leader from the industry with proven experience in driving both operational efficiencies and leading global expansion.

Going forward, we will discuss our North America and offshore operations independently. This is due to the fact that the offshore operation has become a sizable segment and that the dynamics of these operations are quite different.

In North America, our focus has been on consolidating and increasing the utilization of our US and Canadian sites. In the second quarter, we completed the closure of underutilized and underperforming sites that were initiated in the first quarter.

We also announced the closure of our Sarnia, Ontario, location that will be completed by November. This action is consistent with our stated policy of reducing our Canadian footprint as leases expire, given the labor and exchange rate challenges in Canada.

Utilization has and will become a key focus in our North America operation. During the quarter, utilization in the US decreased slightly from 78% to 77% due to lower FTE, and Canadian utilization increased from 63% to 69%, driven primarily by the closure of our Thunder Bay facility.

Our at-home program is also an important component of our US optimization strategy. The four programs we currently have underway have been well received by our clients, and we see continued interest from new prospects.

Turning to page 7, by far the most important strategic initiative in StarTek is the rebalancing of our delivery platform to increase the percentage of revenue from a higher-margin offshore work. This effort, started in 2008 with the opening of our first Philippines facility in Makati, has been grown to over 1200 FTE across three sites and two countries.

During the quarter, we added 600 FTE across these three sites and launched our second site in the Philippines in Ortigas, Manila, with a capacity of 2,000 seats.

In addition, in expectation of continued demand in Philippine services, during the quarter, we secured an additional 1,000 seats within the Ortigas complex, which will be built out as needed in 2011.

With the growth of our two Philippine locations in the expanding Costa Rica operation, our offshore operation now represents 32% of our total seat capacity and 12% of our revenues.

Now let's turn to page 8, while I'll update you on our sales operation. Earlier this year, we made a decision to restructure and expand our sales operation. In addition to appointing a new leader last quarter, during the second quarter, we added four new national sales directors with diverse industry skills. This investment is not only intended to grow the number of new clients, but also to diversify the industry sectors into which we sell. Early results are positive.

In addition to growing the pipeline of prospects during the second quarter, we closed one new online retail client, and recently in July, another online retail. Both of these clients are outside our traditional communications market. Our broader market focus is on higher growth industries that are increasing use of outsourcing off-shoring to reduce costs -- industries such as online retailing, healthcare, technology and energy.

And our success in closing add-on programs from existing clients continues. During the quarter, we added several small programs in our US operation for one of our existing cable customers.

On page 9, I would like to highlight two other significant accomplishments. First was the appointment of a new member to our Board of Directors. Earlier this year, we determined that increasing the number and diversity of our outside directors was important. To that end, in June, we announced the appointment of Chris Smith to our Board.

Chris is President of Cochlear Americas, a Denver-based medical device company, and brings healthcare industry and sales and marketing experience to the Board that will be a help as we grow beyond our traditional markets.

Second, in June, we were honored to receive the best outsourcing provider award at the 2010 call center excellence awards event. The judging was done by a panel of call center experts and leaders assembled by IQPC, who evaluate the entrance on their ability to deliver superior customer experience. The award is further validation of our service excellence and our differentiation as a high-end provider.

Before I go into our future plans, I would like to turn the call over to Dave Durham, our CFO, who will discuss the second-quarter financial results in a little more detail. Dave?

Thanks, Larry, and thanks to everyone for calling in. Our financial results for the quarter came in about as we expected and were consistent with our views shared on last quarter's earnings call.

Our top line was up slightly. We saw improvements in gross profit and gross margin, thanks to continued growth in our offshore segment and we lowered SG&A expenses through payroll cuts, all of which translated to a $1.2 million sequential improvement in our operating results.

This improvement was somewhat masked by incremental impairment and restructuring charges associated with three site closures, and by an allowance taken against the deferred tax asset that negatively impacted our EPS by $0.28. But overall, we feel like operations are improving and the quarter was a good positive step toward achieving our goal of a return to profitability by year end.

So moving on to the details outlined on page 11 of the presentation, revenue for the fourth quarter totaled $67.7 million, up slightly compared to last quarter and down roughly 8% compared to the second quarter of 2009. Gross margin was 11.3%, a 70 basis point improvement compared to last quarter, but down considerably compared to Q2 of 2009.

SG&A totaled $10.3 million or 15.2% of revenue, a decrease of $600,000 compared to both last quarter and the second quarter of 2009. We reported an operating loss before impairment and restructuring charges of $2.6 million for the quarter compared to a loss of $3.8 million a quarter ago, an improvement of $1.2 million.

We incurred impairment and restructuring charges totaling $800,000 in the quarter. The charges are a combination of impairment against assets in our Sarnia, Ontario site, which will close in November of this year, plus adjustments to reserves previously established for our Regina, Saskatchewan and Laramie, Wyoming locations.

Also during the quarter, we recorded a $4.2 million valuation allowance against a deferred tax asset associated with expected 2010 US pretax losses. We have 20 years to carry forward this asset against future US taxable income; and if utilized, we expect our tax rate to be relatively low for the next few years.

As a result of the above items, the Company had a second-quarter net loss of $5.2 million or $0.35 a share. Had we not taken a valuation allowance against our deferred tax asset, our net loss would have been $1 million or $0.07 per share.

The current quarter loss compares to a net loss of $3.1 million or $0.21 per share in the first quarter of 2010, and net income of $1.3 million in the second quarter of 2009, or $0.09 per share.

Slide 12 provides a bridge from Q1 that helps explain the various puts and takes that sequentially improve revenue and gross profit. From a revenue perspective, site closures in Laramie, Victoria, and Thunder Bay that occurred at various points in time in the first quarter of the year, accounted for an expected $1.3 million decline. And lower North American call volumes from our wireless customers translated to a sequential decrease of $2 million.

These declines were offset by a $3.2 million increase in revenue generated by our offshore segment, fueled by an increase in the number of full-time equivalent agents of almost 600, bringing the total FTE count for the segment up to over 1200.

It's worth noting that the offshore agent FTE increase helped us reach the highest quarterly FTE count in Company history at roughly 6,150. Going forward, we expect our offshore FTE count to continue to expand at a rate faster than any potential headcount declines in North America.

The $3.2 million offshore revenue increase drove a $700,000 sequential improvement in offshore gross profit. In the future, we expect incremental increases in offshore revenue to contribute a greater percentage of incremental gross profit as we cover site operating and site fixed costs and have lower program launch costs.

In total, gross profit for the quarter was $7.6 million or 11.3% of revenue compared to $7.1 million last quarter.

Slide 13 outlines the change in current-quarter revenue and gross profit compared to the second quarter of 2009, and illustrates the fairly dramatic impact of our site optimization strategy and our offshore expansion.

North American site closures in Laramie, Thunder Bay, and Victoria negatively impacted revenue by $4.9 million, but contributed 120 basis points of positive gross margin. At the same time, our site in Makati and new sites in Costa Rica and Ortigas contributed incremental revenue of $5.8 million, but due to new program launch costs and lower overall utilization, cost us $200,000 of incremental gross profit and 160 basis points of gross margin.

Our strong expectation and the catalyst for our return to profitability is significant improvement in offshore utilization, which this quarter, was only 40%. The other significant trend on a year-over-year basis is the North American call volume decline from our large wireless customers, which, on a comparative basis, dropped $5 million in revenue and $3.2 million in gross profit.

We expect this decline to level off in the near term, evidenced by recent headcount increases in various sites, but recognize that a decrease in North American call volume among wireless firms is a likely long-term trend, and that we must generate new sales and new industry verticals to help protect against continued deterioration in our North American platform.

Before we move on to the balance sheet, slide 14 highlights our historical revenue, gross margin and utilization mix by segment for the last six quarters. The significance of the slide is less about where we have been and more about where we are headed, depicted by the right-hand column that outlines our margin and utilization targets for each geography. These are targets that we have shared before, but important to reemphasize given the acceleration in our offshore expansion and the expectation that, by year end, nearly 40% of our seat capacity will be in our offshore segment, with incremental capacity for another 1,000 seats in our Ortigas location.

There is plenty of work to do to pull off this shift, not the least of which is the effective execution offshore and success selling new logos to support our US utilization and margin goals. But this is where we're focused, and we believe that the short-term financial pain that we are feeling now as we go through this transition is worth the reward ahead.

Moving on to the balance sheet and cash flow highlights on slide 15, the balance sheet remains strong at the end of June with cash and investments totaling $21.7 million and no debt. Our cash balance declined by $5.6 million compared to the March 31 balance due to slightly higher DSOs, our operating loss, and CapEx that exceeded depreciation due to the buildout of our Ortigas site.

Working capital totaled $52.3 million and our current ratio was 3.2 to 1.

CapEx for the quarter totaled $5.7 million and depreciation totaled $4.3 million.

In terms of cash flow, EBITDA totaled $2.2 million for the quarter, a $1.2 million improvement compared to Q1, still below what we view to be acceptable, but a nice improvement nonetheless.

Finally, I'm pleased to report that we renewed our $15 million senior credit facility with UMB. It was set to expire at the end of this month and did so under the same favorable terms as the original line.

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

Great job, Dave. I would now like to discuss the outlook for the rest of 2010 starting on page 17. First, the overall BPO industry continues to expand as clients seek ways to reduce support costs, increase sales and avoid fixed cost. While outsourcing has always been an attractive vehicle to accomplish this, offshoring has made it even more compelling. Therefore, companies who may already outsource today are being more aggressive in taking the leap of offshore, near-shore, and home agent platforms. This bodes well for our offshore expansion, but does negatively impact the prospects for US and Canadian growth.

Having said that, the equation dramatically changes from vertical to vertical. In our traditional communications sector, outsourcing and offshoring is accelerating as markets commoditize. Add that to the fact that each sector and each company are different and have different revenue profiles, there's no pad answer to, how is the BPO industry doing. It depends on your clients and your industry mix.

In the wireless sector, by far our biggest sector, new subscriber and revenues have slowed from the double-digit growth of three to five years ago. This has slowed the demand in customer support calls and could drive single-digit growth levels for the foreseeable future.

And the wireline sector, our second-largest sector, has been declining and commoditizing for the past several years as new technologies displace older telco offerings. As a result, wireline companies have been downsizing, merging, and cutting costs as a way to survive. The net impact is lower demand for our services and ongoing pricing pressure.

The good news is that the prospects for growth in other segments that we're focused on, namely cable, online retail, healthcare, technology and energy, are all good. In these sectors, we are seeing organic growth, more outsourcing, more offshoring, and a continued focus on high-quality customer experience to reduce churn. This is our sweet spot.

Despite the short-term impacts of declining North America demand and the offshore expansion, our strategy remains intact toward improving profitability and growth.

On page 18, we list our top seven strategic imperatives that's important to reemphasize.

First is to maintain our market differentiation by being more flexible than our competitors and providing high-end customer experience. All of this is while remaining cost competitive and providing flexible global and at-home delivery options.

Second is to grow our existing customers and to add new customers into high-growth verticals I mentioned earlier.

Third is to ride the wave of increasing margins as we rebalance our geographic delivery mix toward higher-margin offshore business.

Fourth is to continue to focus on cost containment; operational efficiencies; site closures where appropriate; process standardization; and US utilization improvements to drive higher levels of profitability.

Fifth is to leverage the investments we made in StarTek@Home last year and sell it as an alternative to North America center-based delivery.

Sixth is to continue and invest in technology to better automate the activities in our centers, like our agent portal, and to provide innovative technology solutions to our customers, like IVR and voice analytics.

Finally, we will continue to aggressively pursue accretive acquisitions, to accelerate our client and vertical diversification, and to scale the business more rapidly.

While a little long-winded, all seven of these elements of our strategy will play on each other and drive us back to profitability and improved growth.

Turning to page 19, our top five focus items for the third quarter are in line with this strategy.

First is to build on the recent momentum of our sales programs and sell more to our existing clients and close more new clients.

Second is to continue to ramp our existing commitments in our offshore locations, while identifying new programs to fill the offshore capacity in the Philippines and Costa Rica.

Third is to increase US and Canadian utilization through the addition of new business and the elimination of nonperforming sites.

Fourth, driven by our new COO, improve our operational efficiencies across our entire platform via restructuring, process standardization and automation.

And fifth, accelerate the growth in our StarTek@Home platform by implementing the recently awarded programs and by continuing to sell StarTek@Home as an attractive alternative to center-based services.

Turning to page 20, our financial outlook for the second half is for steady improvements in FTE and profitability with modest revenue growth. FTE and revenue growth will come from the launch of our recent sale wins and our continued ramp of offshore programs, offset by sluggish North American growth and site closures.

We expect our continued focus on cost management and operational efficiencies to keep SG&A relatively flat, resulting in quarterly improvements in EBITDA and EPS.

Profitability on a net income basis is expected to return in early 2011, as margins and utilization improve and operational efficiencies are realized.

Wrapping up on page 21, the key messages you should have heard today are, one, our clients are happy and our market position is strong.

Two, our sales operation has turned the corner and is positioned for higher levels of future growth.

Three, our offshore mix, coupled with increased utilization, will drive margin expansion.

And finally, if executed well, we expect all of this to result in steady improvements in revenue, margins, profitability, and shareholder value.

Thank you for your time today, and now Dave and I would like to open up the line for questions.

(Operator Instructions). Arnie Ursaner, CJS Securities.

It's actually Fred Buonocore calling in for Arnie. First of all, I just wanted to clarify the comments you just made on the financial outlook. So, just looking ahead, I'm not sure I caught it correctly. You expect modest FTE growth, and what I thought I heard was modest revenue growth through the balance of the year, but the slide says relatively flat revenues in the second half. How should I be thinking about that?

I think FTE will continue to grow, but as the offshore/onshore mix -- the revenue per FTE changes, so flat to slightly up is what I would think about on the revenue side.

Okay, great.

Yes, and I think, just to be more clear on the -- or maybe a little bit more granular on the revenue, I think Q3 will likely be flat with some improvement in Q4. On a first-half, second-half basis, pretty even.

Okay, great. That's helpful. And then just referring to your operating results scorecard on your website, you show the quarterly average FTE for offshore of 1,261. Was it much different at the end of the period? It would be helpful to know what the end of the period number was.

Yes, we were ramping throughout the quarter and it was higher by probably 100, 150 FTE in the final month.

Okay. And then, just thirdly, your utilization for offshore was 40% for the quarter. What sort of utilization do you need there in order to be profitable in that business?

Yes, we cover our fixed site costs and our site operating costs at just below 50% utilization. So, the other anomaly both in the first quarter of 2010 and the second quarter of 2010, we did have some pretty material launch costs that will go away. So we would expect the offshore segment to become profitable next quarter and at levels just slightly below 50% utilization.

Okay. So in other words, you don't expect the same kind of level of startup expenses in Q3?

Correct.

Okay, great. I'll get back in line. Thanks.

Dave Koning, Baird.

I guess first of all, I just wanted to make sure I heard that right. So when you say about flat revenues, you mean the second half being flat with the first half? Is that right?

Correct. With -- Q3 being flat to a little bit down, and Q4 we'll start to see some sequential increases in revenue.

Got you. Okay. And then I guess secondly, how do you expect the FTEs to ramp in the Philippines over the next several quarters and into next year? Do you have kind of a plan there? Just round models like how -- should we expect 2,000 on average next year? Or how should we think of that?

I would think a little bit higher. And the commitments that we have today, assuming that we continue to execute well, would get us close to that number by the end of the year, the year 2,000 number with -- then, we would expect incremental increases throughout 2011 based upon the award of new programs. So in terms of current commitments, that should get us close to 2,000.

Okay. And once you get there, I know utilization can be a moving target because as you ramp new ones, it takes utilization down a little bit. But, should we expect well over 50% as you get a year out from now and gross margins in the reasonably near term to get the 20% plus?

Yes, I think that's fair.

Okay. And then tax rate, that was interesting what you mentioned that the tax rate actually can be meaningfully lower coming up soon. Could that be next year already? And when you say much lower, is that like a 0% tax rate or somewhere between zero and where we're at today?

Yes, it's a little bit -- not to get too technical on you, but, we have tax in Canada because our -- because of transfer pricing that's basically done on a cost-plus basis. So we know that we are going to have some tax expense associated with our Canadian operations.

In the Philippines, it's also due to transfer pricing done on a cost-plus basis, but we have a zero tax rate there because of our [Peza] pioneer status and tax holiday associated with that.

So, we have to achieve a certain level of overall profitability until we -- before we start recognizing US taxable income, against which our deferred tax asset would be utilized. So, it could be as low as 10% if we get some more profitability or to a level of profitability in 2011 that has us generating US taxable income.

Okay. That's helpful. And then I guess the last two, when we look at the two biggest clients -- T-Mobile, it sounds like North America will be continue to be down a little bit, but the Philippines is going to mostly offset it. But overall, T-Mobile, does that keep declining a little bit while AT&T, it sounds like you lost a little program but that should be close to fully offset. So AT&T being more flattish? Are those the revenue kind of -- the ways we should think about it?

Yes, I think given the fact that those two are the biggest chunk of our revenue, and they will track pretty much with what we talked about is a flat Q3 and then heading upward beyond that.

Okay, that makes sense. Okay. Good. Well, thank you.

Matt McCormack, BGB Securities.

Just if there's a little more detail you could provide on the program that's going to India. When did you find out about that? And did you have an opportunity to bid for it? And then additionally, 260 FTEs, should we assume that's about $10 million in revenue that goes away from that program?

Yes and yes. We -- over the quarter, we're working with the client, bidding against competitors. And obviously we didn't have an Indian operation and it is a back-office type of program. And, we were disappointed that we weren't able to secure that. From a revenue point of view, I think your numbers are in the ballpark.

And in terms of the wireline business, what -- what is that of a percentage of the overall Company right now?

We don't disclose segment by segment, but I think, as I said, the majority of that program will be winding down. So on an FTE basis, it's 260 divided by the total number. So it's at --

It's less than 10%.

Relatively small program, but we thought it was worth disclosing given the fact that it's visible, and it's the wireline piece of our AT&T business that we talked about in the past.

Right. In terms of the new wins in the retail sector, could you just kind of talk about what your competitive advantage is -- why you are winning those, given you're historically have been in the telecommunications vertical. And why would those retailers go with you versus a competitor that possibly has referenceable industry clients?

I think on the retail side it's not as important to have industry-specific because it's not that high-tech or very complex work. But, on the -- our differentiation really was the customer experience -- the high-end quality. And the two retailers that we did sign up care a lot about the touch of their customers.

It's not high volume, low-quality type of retailer. It's a very high touch retailer. So we won, got a very competitive RFP in the first case. And if you ask them, it was about our flexibility to be able to do some unique things that they needed; and two, to be able to provide a high-end experience for their customers.

And when those are fully ramped, ballpark, how many FTEs could they potentially have?

They're both very scalable but we don't release any growth numbers by client.

Okay, thank you.

So they reach 10% and then we'll talk about it.

Okay. Thank you.

Howard Smith, First Analysis.

Quick question here on the Philippines startup expenses and ramp-in and profitability. You have 30% target at kind of a 90% level. Are you at the point at your first facility where when you reach that 90% utilization, you will hit those types of profit targets? Or do you still have some I'll call hand-holding expenses over there?

Yes; no, the Makati site in particular, and I'm -- not to get, again, more granular than the segment-level reporting that we do on scorecards. Our Makati site, it will be full by year end, and, we expect will hit those levels.

We actually had the opportunity to again, if we are successful on the current ramp of programs that are ongoing there, you could actually get to utilization north of 100% in our Makati site.

Okay, but the profitability at those levels is kind of hitting your targets.

Yes, yes, absolutely.

And we have visibility, both in this quarter and next quarter to -- to --

To get there.

To know that that's the number, at least the number.

Okay, fantastic. Thank you. I'll leave it there.

Tom Carpenter, Hilliard Lyons.

Good morning, Larry and Dave. I wanted to clarify on T-Mobile -- that business is just shifting locations; there's no actual loss of business? It's just shifting from onshore to offshore?

Well, that's a complicated answer, but let me try to give it to you. There are three or four dynamics going on at one time here.

First of all, the overall seat count at T-Mobile is declining. And therefore, they are shifting it around between vendors, so you don't really lose something. You kind of -- programs move from one vendor to another. The good news is we're a net gain when they do move around. So the overall is down. The high-producing vendors are getting more, so we're getting more.

And then third is the migration from onshore to offshore.

So, and then fourth is we've got sites where -- the Sarnia site, for example, and others, we're moving headcount within our own network around. So, net net, the North America volume is going to decline. Then the offshore is going to increase, and we believe net net, we're going to have FTE increases over the next several quarters, but not a tremendous amount, given the fact that their overall network is flat to slightly negative.

Yes, and I would suggest to you, Howard, that Q2 represents a low point in terms of FTE for T-Mobile. But, because of the shift mix, that won't necessarily be reflected in the revenue numbers given that, obviously, the Philippine rates are quite a bit lower.

Got it. Just a follow-up, you guys have been very successful during the early part of your tenure at StarTek in improving US margins. I know it's been a little bit of a struggle the past couple of quarters with the declines in wireline and some migration offshore. Can you talk about the plan to improve that and get it closer to your 20% gross margin target and whether that's a process over the next year to achieve that or if it's going to be a multi-year process. Thank you.

It's all utilization, right? So, utilization either comes from adding new programs to the US or from shutting down sites, and we've got a little bit of both going on. So where our site optimization strategy a year ago was to get rid of nonperforming sites, our strategy now is to make sure we juice the utilization in US and Canada such that if we do have continued declines, we can get the utilization up despite that; but secondarily, these new programs, some of which are US, to try to add to that.

So, it's a moving target, but we think we can continue to get utilization up in the US and Canadian sites. Obviously, Sarnia going away helps because we're moving some FTE around there.

Okay. Got it. Thank you.

(Operator Instructions). [Omar Samilas], an independent analyst.

I was wondering -- I noticed that your GAAP (technical difficulty) for net income, that you did not exclude the INR for non-GAAP, but you did exclude it for the adjusted operating loss and the EBITDA. So I was wondering if there's a reason for that.

Yes, basically, we just felt because we have had impairment and restructuring charges on a more regular basis, and because, based upon the advice from our auditors, it is included in operating income, which is a GAAP measure, we felt it appropriate to keep those charges out of that calculation.

And more important than being conservative, I think we could have backed it out of EPS and rather than $0.07 given a different number. But I think if you need it, you can do it yourself.

Right. I mean, I was trying to point out how conservative you guys are being.

Second question, if I could, on previous calls, I'm trying to get a feel of what your year-end target for number of seats available is going to be. I'm getting around -- but I know it changes often, so I'm getting around 10,000 in total. I was wondering if you could tell me if that's accurate or not.

Yes, that's pretty much dead on. And, 3,600 or 3,650 is the number that we anticipate having across the three offshore locations.

Okay. And then so I guess 2,000 in Canada and around 4,500 in the US?

Yes.

Okay, okay. Have you considered releasing some kind of a backlog information? Sort of like a book to bill as you close contracted or new? So we can get an idea of your potential in the pipeline?

I think the challenge there is that none of these contracts have a contracted FTE number. The way the business operates is there's a target number and there's a starting point, and then month to month, the FTE numbers flowed up and down. So while we have a estimated backlog, we think that that's a pretty dangerous place to go, given just the nature of the business.

Got it.

Yes, I mean to try to publish a backlog number based upon what we currently know, all of our contracts, number one, are cancelable. So it's very difficult to talk about true backlog.

And then with the specter the pipeline, I think the length of the sales cycles and what Larry mentioned about size of programs and the fact that you often start out with a pilot with 50 FTE, and if you're successful it might turn into 500. So coming up with a book-to-bill ratio is also a very difficult exercise.

Understood. Last question, if I could, the business for the new verticals that you are winning and that you are trying to get, are those mostly targeted for your North American segment or some of them also for the offshore?

We'll take any business we can get, is the kind of answer, but I think two-thirds of it is offshore. If I look at our pipeline, two-thirds of it is targeted for offshore. Probably another half of the third left is for at home, and the other half is for US. So, vertical by vertical, if you think healthcare, more US-based, obviously.

You think retail is more offshore-based, so it really depends on the vertical, but the bottom line is there is some US in there, there is some at-home in there, but a lot of it is offshore.

Thank you for taking my call.

Sure.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to hand the call over to Mr. Larry Jones for closing remarks.

Well, thank you all for your questions and your time, and have a great day and we'll talk next quarter.

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