Startek Inc (SRT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StarTek third-quarter 2010 earnings conference call. My name is Maria and I will be your operator today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). I would now like to turn the presentation over to Ms. Julie Pierce, Director of SEC Reporting. Please proceed.

Thanks, Maria. 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 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 where 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 vary 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 of 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'll now turn the call over to Larry Jones, StarTek's President and CEO.

Welcome, everyone, and thank you, Julie. As Julie mentioned, please feel free to follow along with our presentation that's available on our website. During the third quarter we continued to execute on our strategy of offshore expansion, North American consolidation and expanding our sales operation.

Our North American headcount continues to drop being offset by our continued headcount increases in the offshore. While our total headcount is up over last year and last quarter, revenue and margins decreased due to the effect of lower revenue per [outsource] sheet, lower North American utilization. More on this later.

Over the next 30 minutes Dave and I will provide more detail on the third-quarter results as well as an update on our many strategic initiatives. We will close with an industry and financial outlook followed by a Q&A session.

I'd point you to page 4 of the presentation where we highlight our financial results for the third quarter. Revenues of $66 million represented a 10% decline from the prior year and a 3% decrease from the prior quarter. Gross margins declined to 10.1% during the quarter driven primarily by lower North American utilization. We expect gross margins to continue to improve as we execute our site optimization efforts in North America and continue to grow and fill our offshore locations.

SG&A will remained relatively flat at $10.3 million and was 7% lower than a year ago as a result of a number of cost reduction programs implemented over the last 12 months. As a result of lower revenue, lower gross margins and flat SG&A our operating loss increased to $4.1 million and adjusted EBITDA decreased to $1.1 million.

We reported a net loss of $4.5 million and a loss per share of $0.30. Cash at the end of the quarter was $21.3 million, relatively flat to last quarter which along with minimal debt and a $15 million unused line of credit give us a healthy capital structure with which to execute our strategy.

Turning to page 5, I'd like to now highlight our market and client activities for the quarter. We continue to experience softness in demand for seats in US and Canada. This is driven by the fact that in the telecom and wireless space where most of our business resides today clients are aggressively growing offshore and reducing onshore volume to reduce overall costs.

Revenue from our largest client, AT&T, decreased 6% from the prior quarter and now represents 66% of our total revenue, a decrease from last quarter. At AT&T Mobility our relationship remains strong and we recently signed a two-year extension to the consumer business.

Revenues from T-Mobile, our second-largest client, increased 6% sequentially due to growing programs in the Philippines. During the quarter we secured additional offshore seats, a direct result of our successful rollout earlier this year. Year over year T-Mobile revenues declined 25% due to overall lower demand, site closures in North America, and lower offshore bill rates.

While we currently have a T-Mobile contract effective through October 1, 2011, T-Mobile is in the process of reassessing all vendors and contracts serving their consumer line of business through an RFP process. This represents roughly half of our T-Mobile revenues.

While we believe that our strong relationship and past performance will most likely result in no change to our headcount, there is a possibility of gaining or losing headcount to other vendors and the possibility of changes in pricing and contract terms. We expect a final decision to be made by year end and until then we continue to provide services to T-Mobile under our existing agreement.

The rest of our base grew 2% over last quarter as a result of good performance and new business signed earlier in the year. Growth in our base and new sales should provide continued growth momentum despite the volatility in our two largest clients.

On page 6 we now turn to the operational accomplishments of the quarter. Last quarter we announced the appointment of Chad Carlson as COO who is now responsible for all global operations of the Company. Under his direction this quarter we executed a significant reorganization of our operations, aligning our organization with our largest clients and geographic regions. This new structure will make us more focused, more efficient and provide us a platform for growth and standard global processes.

In our North American operation, headcount decreased just over 300 FTE driven primarily by lower demand in our AT&T programs. This lower headcount resulted in a drop in our North American utilization from 74% last quarter to 69% this quarter and a corresponding drop in gross margins from 14% to 13%.

As a result of declining North American call volumes our focus has been on increasing utilization through the consolidation of underutilized US and Canadian sites. To this end, in the third quarter we continued to wind down our Sarnia, Ontario location which will be completed by year end, and also announced the consolidation of our two Greeley, Colorado centers which also should be completed by year end.

Our @Home program continues to perform well with just over 100 FTE at the end of the quarter. We expect this segment to continue to grow as we continue to ramp a new client.

The next page highlights the success of our offshore expansion. During the quarter we added more than 300 FTE in our Philippines and Costa Rica operations, this was driven by growth from existing programs as well as the launch of one new client program. With the growth in these two countries our offshore operation now represents 36% of our total seat capacity and 15% of our total revenues.

During the quarter we also completed the buildout of an additional 500 seats in our Ortigas site. Accounting for the additional capacity and the incremental FTE, offshore utilization improved 300 basis points from 40% in the second quarter to 43% in the third quarter.

For the same period gross margins for the region improved from a negative 7% in the second quarter to a negative 4% in the third quarter. As we continue to ramp existing programs in all three locations we expect to see positive offshore gross margins in the fourth quarter and beyond.

Page 8 talks to our sales expansion efforts. Our sales restructuring effort initiated early this year is starting to produce positive results. During the third quarter we added one new sales director which brings our total commissioned sales force to a total of eight people. As we mentioned last quarter, this expanded sales force will allow us to broaden our market focus beyond the communications sector to include higher growth sectors such as cable, online retail, healthcare, technology and energy.

During the quarter we signed three new add-on programs in our existing client base and two new client contracts. The first contract win, which we discussed in our last call, is a prestigious eRetailing client which has already begun to ramp in the Philippines.

The second win is a well-known social media company where we'll be handling voice, e-mail and chat in at @Home environment. With the growth in social media this client represents our first foray into a new and exciting industry vertical. The addition of new sales execs and a refocused lead generation initiative have resulted in our sales pipeline continuing to grow both in size and in breadth.

Finally, on page 9 we identify three other significant accomplishments during the third quarter. First, consistent with our ongoing effort to diversify our Board of Directors we recently appointed John Harris as a new member of our Board who brings a wealth of BPO and international experience. Most recently John served as President and CEO of eTelecare from 2006 through its acquisition by Stream Global Services in 2009 and for 26 years served in a variety of the executive positions at EDS. We're pleased to have John on our team.

Second, we continue to invest in a number of technology initiatives. In addition to continuously updating and expanding our back office and our call center infrastructure we have a number of internal automation and agent dashboard projects underway. During the quarter we began testing our new agent portal which is intended to drive agent and supervisor productivity.

In addition, we began to develop a roadmap for the new technologies required to serve the rapid adoption of multi-channel customer care, which includes e-mail, chat, social media, intelligent phones and video capabilities.

Finally, we've been very active in the M&A front. Deal activity has picked up as smaller private BPO firms look to sell to larger players to gain scale, breadth and international reach. As we've stated before, our intent as to identify accretive acquisitions, to accelerate our client and vertical diversification, and to scale the business more rapidly.

With that now I'd like to turn the call over to Dave Durham, our CFO, who will discuss the third-quarter financials in more detail.

Thanks, Larry, and thanks to everyone for calling in. Our financial results for the quarter came in below where we expected when we shared our views about the second half of the year on last quarter's earnings call. Our topline was down as expected due to the continued migration of wireless care business moving offshore at lower bill rates.

And while our FTE count offshore was up sequentially by over 20%, that increase did not translate into the level of incremental gross profit that we expected due in part to higher than forecasted ramp up costs in the Philippines. We kept SG&A expenses flat compared to last quarter as planned, but overall our third-quarter operating loss widened by $1.1 million compared to Q2.

So moving on to the details outlined on page 11 of the presentation -- revenue for the third quarter totaled $65.6 million, down 3.1% compared to last quarter and down roughly 10% compared to the third quarter of 2009. Gross margin was 10.1%, a 120 basis point drop compared to last quarter and down considerably compared to Q3 of 2009. SG&A totaled $10.3 million or 15% of revenue, flat compared to last quarter and down about $850,000 compared to the third quarter of 2009.

We reported an operating loss before impairment and restructuring charges of $3.7 million for the quarter compared to a loss of $2.6 million a quarter ago. We incurred impairment restructuring charges in the current quarter totaling $450,000. The charges are in connection with our decision to consolidate our two Greeley, Colorado call-center operations plus assets that we impaired in another US location where future cash flows did not cover the carrying value of certain fixed assets.

Despite reporting an operating pre-tax loss we actually incurred income tax expense of $400,000 due to taxable income generated by our Canadian operation which we could not offset with US operating loss carry forwards due to a valuation allowance recorded against our US deferred tax assets.

As a result the Company reported a third-quarter net loss of $4.5 million or $0.30 a share. The current quarter loss compares to a net loss of $5.2 million or $0.35 per share in the second quarter of 2010 and net income of $1.8 million in the third quarter of 2009.

Slide 12 provides a bridge from Q2 that helps explain the major elements that contributed to the revenue and gross profit decline. From a revenue perspective the continued ramp of our offshore and @Home businesses incrementally contributed $1.7 million and $200,000 respectively. These gains were not enough to offset the North American wireless and wireline volume declines which combined totaled $4.2 million.

The $1.7 million offshore revenue increase drove only a $100,000 sequential improvement in offshore gross profit. This sequential gross profit increase was well below our expectation due in part to higher than expected training and facility costs in our new Ortigas site.

It is worth noting that our Makati facility is now full and consistently profitable and our Ortigas facility ended the quarter with an FTE count that brings that operation very close to breakeven. In total we now have over 1,500 FTE across our three offshore facilities and we fully expect future incremental increases in revenue to contribute a greater percentage of incremental gross profit. In total, Gross profit for the quarter was $6.6 million or 10.1% of revenue compared to $7.6 million last quarter.

Slide 13 outlines the change in current quarter revenue and gross profit compared to the third quarter of 2009 and, as in past quarters, illustrates the dramatic impact of our North American site optimization efforts and our expansion offshore. North American site closures in Laramie, Thunder Bay and Victoria negatively impacted revenue by $4.1 million, but contributed $700,000 of incremental gross profit and 210 basis points of positive gross margin.

The other significant trend year over year is the continued decline in North American call volume delivered by our large wireless and wireline customers which combined cause revenue to drop $10.6 million and gross profit to decline by $6 million. Offsetting those declines is the migration of work to our offshore sites where FTE increased by over 1,100 and revenue increased by $6.4 million.

As was the case last quarter, new program launch costs and low overall site utilization led to a $600,000 decline in gross profit for that segment from a year ago and a 230 basis point drop in gross margin. Our strong expectation and the primary catalyst for our return to profitability continues to be the improvement in offshore utilization, which this quarter was only 43%, but is expected to exceed 50% in the fourth quarter of this year.

Before we move on to the balance sheet, slide 14 highlights our historical revenue, gross margin and utilization mix by segment for the last seven quarters. We shared this slide for the first time last quarter and believe it is important to share again as it remains our primary objective to dramatically shift the geographic revenue and gross margin mix and ultimately deliver overall operating margins comparable to our public company peers.

Moving on to the balance sheet and cash flow highlights on slide 15, the balance sheet remained strong at the end of June -- or excuse me, at the end of September, with cash and investments totaling $21.3 million and no debt, working capital totaled $50.5 million and our current ratio was 3 to 1. CapEx for the quarter totaled $3.3 million and depreciation expense totaled $4.3 million.

In terms of cash flow, EBITDA totaled $1.1 million for the quarter a $1.2 million decline compared to Q2. And with that I will turn the call back over to Larry.

Thanks, Dave. Now I'd like to discuss the outlook for the industry, the rest of 2010 and some color on 2011. The wireline or telco sector seems to be stabilizing as disconnects slow and players push new products such as high-speed Internet and content. Their budgets are tight so outsourcing is popular, but we do expect to see little long-term growth and continued pricing pressure in this sector.

In the wireless segment, it continues to transition from a high-growth business driven by additional new subscribers to a single-digit growth business that will grow revenues by increasing revenue per subscriber and grow profit by reducing operating expense. As a result we expect modest seat growth and continued offshore migration. Our growth strategy is to continue to provide the highest quality service and to win share in these accounts which we have consistently done in the past.

While the demand for Philippines remains strong we're also seeing an increased interest in Latin America where clients need to diversify their offshore footprint. In the last quarter there's been an increase in the number of site visits in our Costa Rica facility for this very purpose. Finally, we remain excited about the prospects of growth for our new vertical segments that are growing and are increasing their outsourcing share, specifically cable, healthcare, technology and energy.

Turning to page 18, our top priorities for the quarter are -- first, to continue to grow new business from our existing clients and our new high-growth vertical industries.

Second is building on our offshore successes to continue to grow our programs in the Philippines and Costa Rica to drive higher utilization and higher gross margins. Our target is to ultimately have 45% of our revenues from offshore locations and gross margins north of 30%.

Third, given the waning North America demand we continue to eliminate underutilized North American centers where appropriate to drive utilization and margin improvement. In addition, we'll use @Home as a vehicle to provide flexible staffing solutions and to provide a lower cost US option to our clients at improved margins to us.

Fourth, with the global realignment of our operation behind us our focus is now on driving process and technology standardization across our global platform to provide consistent, reliable and lower cost service.

And finally, with the growing importance of technology both in our centers and in delivering multi-channel client solutions we're focused on delivering new technology to our agents and are continuing to invest and partner in industry solutions to expand our multi-service channel offering.

Turning to page 19. We expect fourth-quarter revenues to be relatively flat to the third quarter. Continued growth in our offshore segment will be offset by losses in our US and Canada operations. For the full year we expect revenues to be down 6% to 9%, again driven by offshore migration and reduced North American volumes in AT&T, T-Mobile and certain wireline clients.

Looking to 2011, while we expect to grow our FTE, we do expect continued year-over-year revenue declines until new sales programs ramp sufficiently to offset the impact of lower revenues per seat in our offshore program.

Despite the revenue declines we expect margins to improve due to better utilization in North America, due to consolidation in new sales and better utilization in our offshore platform due to program growth and new sales. In addition, we expect margin improvements from operational efficiencies realized through the programs that I mentioned earlier.

In wrapping up, the key messages you should have heard today are -- one, our offshore expansion has been a big success and we believe that it has and will continue to play a big role in our growth and profitability strategy. Two, North America contraction will most likely continue and will drive more site consolidations as appropriate. Three, our sales results are improving and are resulting in more business that will drive growth into 2011. And finally, we expect improved profitability as our utilization improves and we increase our offshore metrics.

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

(Operator Instructions). Arnold Ursaner, CJS Securities.

Hi, good morning. My first question, in your view about a revenue decline in 2011 you provided some information about your T-Mobile consumer business coming up for a rebid or review at the end of the year. When you gave your view of revenue decline in 2011 what assumption if any are you making about that contract continuing?

The assumption is that the contract will continue as is. As I said earlier, we could get more FTE, we could get lower FTE, we could get price reductions, but we're assuming steady state in that projection.

And remind us again how long ago was that contract signed, the one that's up for renewal? (multiple speakers) of a margin?

The last time it was signed I think in 2008, it's been extended, it currently runs through 2011. And it basically has an auto renewal on it annually.

Okay, you gave us your view on wireless where you expect it to be down single digit next year. What sort of view do you have for wireline next year?

Well, we announced last quarter that we are winding down our AT&T wireline program, which had around 260 seats. So that will be declining over the next three quarters; that will put negative pressure on the FTE and the revenue. The other accounts that we have in wireline, I think steady to slightly down maybe, but probably not a major impact on the overall numbers.

My final question relates to the whole international offshoring actions that you've taken. The utilization this quarter was 43% and my recollection was that once we got above levels in that area that it would be -- it would turn profitable and would actually start to have dramatic incremental margin. Is there some other -- I know you mention some higher costs, but has your view about where you turn to profitability changed for international?

Arnie, this is Dave. No, it hasn't. And we did incur some additional ramp-up costs in the quarter around facilities and incurred some additional training costs. Our expectation going into the quarter was that we would be profitable at the utilization rate that we reported and I think with a little bit better execution we would have been. But I think it is fair to believe and it's clearly our assumption for the forward-looking remarks that we've made that any incremental revenue improvement from here will result in a pretty significant incremental gross profit gain.

Thank you very much.

So the base assumption hasn't changed and our target is still 30% for offshore once we get to 90% utilization across the enterprise. And as I mentioned in my comments, Makati is now full and delivering nice results and Ortigas continues to ramp nicely. We did have some headcount growth in Costa Rica as well, but we've still got some work to do there to fill that location.

Thank you very much.

Dave Koning, Baird.

Yes, hey, guys. So I guess first of all you mentioned profit improvement in 2011. Does that mean a return to positive profits or could that just mean less of a loss than 2010?

Yes, Dave, this is Dave Durham. Yes, our expectation is that we will return to profitability in 2011.

Okay, good. And if you have any timing kind of mid-year, early year, any rough timing yet of that?

We're still in the process of putting our business plan together for 2011, so I think it's premature to speculate on that. But our clear expectation for the year is to return to profitability.

Okay, so that's good. And I would imagine into next year that US and Canadian margins probably don't change a lot. I guess if you rationalize some of the costs maybe go up a little, but that's offshore, far and away is the big changes. You said both are in profit mode message so you'd expect much better margins there where the other two have less of an impact.

Yes, I think that's definitely the big driver. I will tell you though that the site consolidation in Greeley that we announced really won't have an impact until 2011. But the site that we closed was about a 600 -- or that we intend to close has about 600 agent seats. So consolidating the work that remains there into our other Greeley facility will greatly improve utilization in those two sites and we'll also get a lift in Canada from the closure of Sarnia which won't occur until December of this year.

So I think you're right, and it's our expectation that the bump it's not going to be material. But our expectation is to still try to get US margins to 20% and Canadian margins kind of in the 10% to 15% range. The other wild card, if you will, with respect to US margin is @Home where our margin expectations are a little bit higher than they would be in a brick-and-mortar site. So to the extent that we can expand the @Home platform that's also an opportunity for us to get better margins in the US.

Okay. And then on exchange rates, I think in the Q you're at $1.05 or so for Canada through the rest of the year, that's pretty close right now, I think $1.03 or something, so that probably doesn't have much of an impact. The pace of the Philippine peso rate you're hedged I think at 46.5, but right now we are at 43 or 43.5 (multiple speakers) spot rate. So (multiple speakers).

Yes we (multiple speakers).

Okay, go ahead.

Yes, we're covered for the rest of this year kind of in the 45 to 46 range and we've covered part of the first half of 2011 at roughly 43.5. But we are looking for opportunities to lock in some favorable rates there, but your observation is correct that the dollar does continue to weaken against the peso and will be a headwind going into 2011.

Okay, that's fair. And to me it looks like though that there's enough of a tailwind behind the utilization getting so much better that --.

Yes.

Yes.

Yes, I don't think FX is going to be the (multiple speakers) for anything material in terms of our Philippine margins.

Okay. And then I guess maybe the last thing. The cash flow has been quite good relative to the earnings this year. And I guess I'm wondering would you expect that to continue and could there be any cash charges coming that would take down your cash balance just around some of these consolidations. Or is the operational cash flow, etc., good enough that the cash would continue to build?

Yes, and we're obviously watching our expenditures very closely with respect to CapEx. CapEx for the quarter was $3.2 million, $2 million of that was the completion of kind of the current phase of our Ortigas facility. And until we have commitments for more we're not going to spend any more in terms of CapEx.

So that number will come down a little bit we expect in Q4. And we're basically operating at basically neutral cash flows. So, we do expect margins to expand, we do expect EBITDA both in aggregate or both in just nominal dollars and as a percentage of revenue to improve. So, I don't see cash really deteriorating from here.

Okay, great. Thank you.

Matt McCormick, BGB Securities.

Yes, hi. A lot of questions on the revenue mix and the ideal margin. Can you just remind us of -- in terms of the timing when you think that the migration will be complete and you'll be at 45% offshore and if that timing has changed over the last several months?

Yes, this is Dave, Matt. And we've never really put a date on that target. And a lot of it is just contingent upon the demand that our clients have to migrate work from North America to offshore. But it continues to be the target.

I think one way to look at it is the capacity that we see having. So we have US capacity shrinking, we have offshore capacity expanding, and I think as Dave said, you can think about the offshore seat count that you see there, pretty stable for probably the next six to 12 months. So therefore it really depends on what happens in North America as a percentage.

But I think the good news is that we have plenty of capacity in the offshore platform, we have plenty of demand, both in our existing clients and in new business that we have in the pipeline. So I think it will be totally driven by that phenomenon, coupled with whether we can stabilize the North America headcount through both new sales and through the AT&T and T-Mobile contracts.

Yes, Matt, the other -- to Larry's point and a data point that might help you, the Greeley consolidation, if you -- I'll reference our scorecard that we published, and I don't know if you've pulled that down off the website yet. But there's roughly 10,200 seats in the total mix, we don't see offshore growing unless we have the business to grow that seat count.

But the US will come down in 2011 by roughly 600 seats from the 4,600 that we have today or that we reported and the roughly 2,000 seats in Canada will come down by about 400 at the end of Q4. So, I don't know if that helped you, but it at least gives you a sense of our seat capacity where we think we'll settle in based upon the closures that we know about and our expectation is to get to 90% utilization in offshore sometime by late 2011, early 2012.

Okay, no, that is helpful. In terms of the decline in the wireless and the wireline, just to kind of be clear, the wireline, you had already expected that, right, because of the previously announced contract and then the wireless migration, I mean was that as planned or did that accelerate?

I think if we go back to the beginning of this year, we expected to have about the same number of seats in the offshore, so we expected both AT&T and T-Mobile to kind of ramp off shore, which they did. What we didn't expect is them to cut back on the North America seats as fast as they did.

So I think we had previously said that we -- the offshore growth was going to be half new business and half migration, it's turning out that it's being more (technical difficulty) and some of that business economy dynamics of those two -- of the wireless side of the business. Their volumes are down, their subscriber base growth is slowed more than they expected and all of that has added to the shrinkage in the US and Canada.

Okay. And turning to new sales, you obviously talked about the sales force and the two contracts -- two new wins. Just generally speaking, is the sales cycle right now -- has it been elongated? I've heard from some that new logos are not being signed as quickly as in prior quarters and I just wanted to know if you're seeing that same kind of delay.

We're not seeing a noticeable delay in the sales cycle itself, it's a little hard for us to see because we started the -- probably mid-year last year we had three sales reps, now we have eight. So we've got a lot of momentum and different kinds of pipelines and we're selling to different verticals. So I don't have a steady state to compare it to. But I think in general the deals we're closing are not long term sales cycles and they're pretty consistent with what we've seen in the past.

Okay. That's all I have. Thank you.

Howard Smith, First Analysis.

Yes, thank you, good morning, gentlemen. Most of my questions have answered, but I want to ask a question about the closing of Sarnia and the 400 seats there. Has that been ramping it down in terms of revenue or is that kind of program going pretty much full throttle into Q4 and then you'll use both the revenue and the seats this quarter?

Yes, Howard, this is Dave. The -- and I don't know if you followed the presentation as we were going, the PowerPoint that's out there, but the North American volume decline that we referenced on slide 12, that 310 does include the ramp down of the Sarnia. So that --.

Right, so the cost benefit -- the margin benefit, you'll get the bulk of that when you actually close the site.

Right, right.

But from a revenue perspective a lot of that's already been felt?

Yes.

Okay, that's what I thought, I just wanted to confirm.

And Q1 is where we'll see the expenses running off.

Yes, and we'll -- just in terms of how we describe it, it will become a site closure once it's closed and we'll reflect it that way in any analysis that we do.

Right, got it. Thank you.

Yes, thank you.

Madhu Kodali, Yaksha Capital.

Hi, thank you, thank you for taking my questions. I was wondering on the AT&T, after you wind down the wireline the 260 (inaudible) seats, you talked about -- I guess you just had the wireless at that time and so could you talk about where would you be in terms of AT&T in terms of revenue and number of seats maybe towards end of the year given what you know today?

Yes, this estate. Dave. I guess maybe the way to think about and what we indicated on last quarter's call when we announced the decline in that line, expect about a $10 million annual revenue decrease, we will maintain and retain, I should say, a part of that business, so we'll I think that the end of the day end up with about 50 seats supporting those wireline lines of business. But the revenue hit will be about $2.5 million a quarter once it's fully ramped down. And that ramp down will occur -- started in August and it will finish in April of 2010 -- or excuse me, 2011.

So what would be -- in terms of percentage of revenue, total revenue for AT&T at that point?

It will still be north of 50, even without that $10 million.

Right. Okay, and once you're done with the closing of these and consolidation of the facilities in the US, what kind of cost savings would you expect going into Q1, 2011?

Yes, that's really kind of getting a little granular and we're, I don't think, in a position to really disclose specific numbers. But the one thing to keep in mind about the Greeley facility that we announced that we're closing, it as a facility that we own, so therefore there will not be any restructuring costs associated with any lease liability that you might have in another location.

I think the best way to look at is look at utilization. So as Dave went through the numbers before as we reduced the number of seats, utilization will increase in North America and therefore the corresponding margin increase.

Right. And so what are the plans for the facility you own? Would you be losing that at this point?

We're still exploring different options. So, if we sell more work to another client or to the embedded base, it's conceivable that we could reopen it for call center operations. If not then we'll explore sublease and sale options if we need to.

Right. On the gross margins, once you close these facilities that you are in, would you then jump from (technical difficulty) range then?

It wouldn't be just a function of the site closures, we would need to improve utilization in the remaining sites. And also, as I mentioned earlier, expand our @Home platform to get there.

Okay.

So, I wouldn't think about it in terms of us getting 20% early in 2011 or anything like that in the US.

And you talked about technology standardization across various centers. Could you maybe talk about what do you have today and what sort of plant standardization, what products you are planning to use and if there is additional CapEx going into that?

Yes, this is Larry. I think first of all our underlying back office and call center infrastructure is very solid, we use VoIP, we have all the latest technology. So it's not -- we're not talking about upgrading our call center infrastructure technology, we're talking about a technology at both the agent level and the supervisor level in the form of a portal, which we think we can get some efficiencies out of and on a number of fronts, from coaching to reducing handle time to making the operations just generally more efficient.

We've also got a number of kinds of automation of the standard processes that go on in the center along with kind of standardization across all of our centers. So we've run a pretty entrepreneurial organization for many years and therefore each center kind of operates under their own model with Chad Carlson joining we are rolling out a standard operating platform that will be consistent across every center and we think that will also produce some very good efficiencies.

The one CapEx item that I would point out, we expect by the end of 2011 to be fully on the Voice over IP platform, we have a number of sites that still remain with a dedicated switch in the site. And so as those switches reach the end of their useful lives we'll retire those and migrate over to the Voice over IP platform. So, there is incremental license cost associated with that migration, but it's not -- it shouldn't be material in terms of overall CapEx.

Right. And as to adding more seats offshore, I guess you already went through quite a bit of expansion adding some 500 I guess this quarter. What else is left in terms of expanding in terms of your plans and how much of it is based on winning customer deals or expanding?

I guess both in Costa Rica and in the Philippines we have plenty of seats as you can see in utilization numbers. And therefore I think both in the current programs that we have committed and in the sales pipeline we don't see any requirement to add seats in any of those platforms anytime soon.

We are always exploring where we would expand next in Latin America. The Costa Rica facility is the one that we'll probably tap out first, and therefore we're looking at potentially other countries in Latin America. But again, I wouldn't expect to see that any time soon, we're just always ready for that. Dave may be able to talk about the CapEx requirement for expanding seats.

Yes, the only -- and I think I mentioned it on the call. There are roughly 3,700 seats that are built out, some of -- not all of those have all of the IT and telephony connectivity spent. So there's a little bit of IT expense that would be incurred as we expand in the Philippines.

And then we've got the ability to expand by another 1,000 seats in the Philippines in our Ortigas location that would be leasehold improvement and the typical site buildout costs associated with that. But we don't intend to spend that CapEx until we've got commitments for the physical seats.

So on a run rate you did what, $3.3 million last quarter in terms of (multiple speakers)?

Yes.

Would you expect (multiple speakers)?

So I guess maybe the way to think about CapEx, and we've kind of talked about this in prior calls. But just from a pure IT spend in some cases driven by client demand and maintenance of existing facilities and PC refresh activities, those types of things, I think in terms of $8 million a year or $2 million a quarter on a run rate basis.

And then to the extent that we build out additional seat capacity, I think in terms of for an incremental 1,000 seats in specifically offshore locations, think another $3 million to $4 million of CapEx associated with that kind of activity. So, we don't have any plans to do that until, again, we have commitments for the seats. So looking forward to 2011 I would think in terms of kind of an $8 million to $10 million CapEx run rate.

Can you elaborate a little on the last two programs you started, two new clients you added? And where do you stand today in terms of ramp up in terms of what you signed up for and how long will it take to get you to your maturity level? And maybe you can also talk about what do you have in pipeline in terms of industry sectors or where you are in that?

This if Larry. Yes, so first, the two programs we have, one is about half ramped up, the other one that we closed later in the quarter is about one-third ramped up. And these are all for Phase I of the commitment. Many times we sign a contract there's a Phase I followed by if you're successful there's opportunity to go further beyond that. So I would tell you that they will continue to ramp over the next two quarters most likely.

As far as deals in the pipeline, we're seeing a much broader diversity, very little telco and wireless, a lot of technology, a few retail and some other kind of the disparate -- got some auto and some other things in the pipeline. So, very -- the results we're looking for by bringing in a diverse set of sales executives and some of our lead generation initiatives are paying off and the pipeline is much broader than it was 12 months ago.

Right. And once you finish up these two projects how many seats will that be total? And do you already have those included in the CapEx that you already spent?

Yes, I think the directional statement that we made, or at least that I did in my remarks, was that we expect our offshore segment to be north of 50% utilization in the fourth quarter. So I think that's maybe the way to think about it. And there's no incremental CapEx that's required to complete the ramp of those programs.

I think specifically we don't give client names or headcount relative to bringing on new contracts.

Okay. And how many of these salespeople are quota driven and what's the typical quota per sales guy?

We've got eight people that vary from $5 million to $10 million depending on the maturity and how long they've been on the Board.

Okay, great. Thank you very much. That's it for me.

Thank you.

[Omar Samalad], independent analyst.

Hello, guys. I just wanted to clarify, the 400 seats that are going to drop in Canada, that's for this Q4 coming now?

The seats -- that program will ramp down by the end of 2010. So, they will remain in our seat count in Q4 and they will drop off in Q1.

The FTE there has been ramping down for the past five months. And I would say it's probably half-way there. And by the end of the year they'll be gone.

Okay. And then for the US number of seats, what is your expectation for Q4 and then maybe Q1?

Q4 will be flat and then Q1 2011 will be down by 600.

600, okay. So, are you expecting more or less the same kind of utilization rate in this Q4 than you had in Q3?

Yes, it will actually come down in the US and Canada. Utilization will decline there and go up in offshore. But taking out the two locations where we know we're going to either consolidate or close, sans those two locations we expect utilization to be relatively flat across the remainder of the North American sites.

Okay, got it. Okay. Obviously it was I guess disappointing that you didn't get to your let's call it high 40s utilization on the offshore where you thought you could break even. Are we to expect similar ramp-up costs in Q4 or should it drop significantly from here?

One of the biggest things that happened in this quarter was we brought 500 seats online. So, by bringing 500 seats online we actually -- while we added 300 seats we also -- added 300 FTE, we also added 500 seats. So I think we've had kind of push and pull, we don't see that happening again in the fourth quarter.

But did something happen on your utilization plans that it didn't reach that 47% to 48% level you were targeting?

Yes, I mean going into the quarter I would say revenue was -- came in a little bit below where we thought it was going to, which was part of the reason for not getting the profitability in that segment.

Is that the revenue per seat that you alluded to that was a little lower than what you expected?

No, I mean the revenue per FTE, if you will, did not go down. We did incur a little bit higher than expected training costs due to higher attrition than we expected, again specific to the Philippines. But we expect those things to -- we assume that those things are behind us.

I think in your -- in one of your slides, I may be wrong, but I think you alluded to a lower revenue per FTE on the offshore expected going forward. Is that going to be much lower than the let's say 6100 per FTE that you now are getting?

No -- yes, I think the comment is that we expect revenue -- overall we expect revenue per FTE to go down as North American -- North America contracts and offshore expands.

Okay, so not specifically to offshore?

Yes, not at all.

Okay, perfect, okay. Do you still -- I know that you've been -- in the past quarters you've mentioned that you were hoping to reach profitability by Q4. Is that still an expectation or have things changed significantly on that?

Yes, as Larry kind of alluded in his directional comments for the remainder of the year, we do expect revenue to be flat to slightly up in the fourth quarter and expect a little bit of margin improvement. But I think it's unrealistic to expect us to be profitable in Q4.

Okay, all right. And obviously with -- the revenue decline for 2011, do you have a sense of -- it's not going to be like in the low single digits or much more than that?

I think as Dave said earlier, we're still trying to refine our plans. It will be totally based on the fact that what our forecast is for North America declines and new sales both in North America and in the offshore. So, too early to tell.

But I think it's important that we set the expectation that because of -- even if we did nothing but change 300 FTE lower here, 300 FTE lower there, the mix change and the revenue per seat mix change is going to drive negative revenue growth just from a core business.

Right. And obviously -- that's obviously to get more productivity over seat and your margin is going to be higher. Do you think that you'll be able to achieve those target margins sometime in 2011 or has this pushed everything forward a bit?

I don't think that the 24% that's highlighted on -- I'm forgetting the slide number -- slide 14.

Slide 14, yes.

That is not a -- target is not a 2011 and number. So --.

Okay, and (multiple speakers).

I think that would not be -- it's not our expectation that we'll hit that for the year.

Right, right. Okay, but obviously it will be much more improved than -- I gets closer to that than closer to where we are now is my point, I guess.

Yes. No, I think that's a fair assumption.

Okay.

And I think it's also a fair assumption to expect improvement throughout 2011.

Okay, okay. I know that you have a share repurchase program in place and I know -- I more or less know your feelings on it. Obviously today was a bit disappointing from what was expected as stock got hit pretty badly reaching 380. Are there any plans at a certain point, a certain price support your stock price? I mean, at a certain point it kind of makes sense putting some of the capital work at this level than even building more seats in terms of replacement costs.

Yes, I think we -- as you know, we have a program in place and can pull the trigger at any time. It's heavily debated at the Board level often -- every quarter. And I think anytime we get this kind of reduction in stock price we will have another call and kind of talk about it. So, I can't say anything plus or minus, but it's something we do talk about a lot.

Okay. Okay, guys, well good luck going forward.

Thanks.

George Melas, MKH.

Good morning, thanks for taking my question. Two questions about offshore. You said Makati is basically full and operating pretty much as you expect. Can we assume then that the margins in Makati are hitting your 30% goal?

Yes, we don't get site specific with respect to margins, but I think it's fair to say that we're delivering consistent profitability in that location and we're pleased with the programs that we have in that site.

I think the other way I would say it is that it is our test point to know what we think the target margins are for the rest of the region. And therefore we wouldn't have a target of 30% if we didn't think we had been able to do that before.

Okay, very good. And then second question, in Ortigas as you're ramping up you said this quarter you had higher training costs and then also higher facility cost. Are the facility costs permanent or are they just a one-time thing?

They are -- well, I would tell you that our forecast was a little bit lower than it should have been going into the quarter. But our expenses were higher this quarter than we expect them to be on a go-forward basis.

Okay. But can you explain a little bit what does that mean -- higher facility cost?

The facility cost is totally related to the 500 seats that we brought online. So we built out and started taking expense for the 500 extra seats that you see in that capacity -- in the scorecard. So that's the facility side. On the training side we are ramping still a number of programs there and your ramping training expense is a one-time as you ramp the program. As the program stabilizes obviously you get that training expense now becomes revenue and you have much higher margins.

Okay, very good. Okay, that explains it. Thank you very much.

Thanks.

At this time there are no further questions. I'll turn the call over to Mr. Larry Jones for closing remarks.

I thank all of you for your time and your questions and we'll see you next quarter.

Have a good day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a great day.