Startek Inc (SRT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 StarTek earnings conference call. My name is Tanisha, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we'll conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Julie Pierce, Director of SEC Reporting. Please proceed.

Thanks, Tanisha. 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 fourth 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 investor section of our website next to the webcast link. 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 those projections.

Further, our discussion today includes some non-GAAP measures.In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP-basis measurements. These reconciliations can be found in 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, and welcome everyone. All of my comments today will follow our presentation that's available on our website, so I encourage you to follow along. Over the next 30 minutes, Dave and I will provide you detail on the fourth quarter and full-year results, as well as an update on our plan for 2011. But before we do this, I'd like to provide a context for these results as it relates to our four key strategic initiatives. On page four, we highlight these initiatives.

By far, the most important initiative is to expand our offshore footprint to globalize our operation. Several years ago, we began this effort by opening our operation in the Philippines to meet an increasing client demand for lower labor costs. Today, we have over 2,000 FTE in Makati in Ortigas, Philippines and Heredia, Costa Rica. While this initiative will result in significant margin expansion, as we approach our target of 40% of our revenues offshore, but 2010, these sites were ramping and represented a significant drag on our overall margins.

Our second strategic initiative is to rationalize our North America footprint. In 2010 and early 2011, we closed five US sites as our existing clients migrated to offshore. In addition, it became more and more difficult to sustain profitable operations in Canada due to wage inflation and foreign exchange pressure. Therefore, over the past 18 months, we've closed three of our six original Canadian sites. While these site closures will result in higher utilization and margins in 2011, they represented a drag on 2010 revenues and margins.

Our third strategic initiative is to grow the top line through the sales of new business. Our new and expanding sales team is focused on selling and to our traditional communication sector, as well as expanding our list of clients in new sectors such as retail, technology, energy, and healthcare. Our final initiative is one of cost containment. This is important in any BPO business, but especially important in a declining-revenue environment. Over the past year, we've initiated a number of programs to reduce SG&A, both in our corporate and our field operations and expect to keep SG&A to over $40 million a year in 2011.

Through these key initiatives, we're managing the business through the onshore to offshore transition and expect to end up at the end of 2011 with a smaller but healthier and more profitable business, from which we can grow in 2012.

I would now point you to page five of the presentation, where we highlight our financial results for the fourth quarter and full year 2010. Revenues for the fourth quarter were $64.7 million, representing an 1% decline over the prior quarter. Gross margins for the quarter declined slightly at 9.7%, and SG&A was up to $11.8 million due to severance expense incurred from our cost-reduction programs I discussed earlier. As a result, we reported today a net loss of $6.6 million, or a net loss of $0.44 a share.

For the full year 2010, revenues were $265 million, a decline of 8% from 2009 due to North American site closures and the effect of offshore migration. Gross margins of 10% were significantly off 2009 levels, primarily due to lower utilization as we close North American sites and opened new offshore capacity earlier in the year. Net loss for the year was $19.4 million and a net loss of $1.30 per share. As a result of lower gross margins, EBITDA fell from $24 million in 2009 to $4 million in 2010. Our balance sheet remains strong as we close the year with $19 million of cash and no debt.

Turning to page six, I'd like to discuss the market and client highlights for the quarter. We continue to experience softness in demand for seats in the US and Canada, primarily from our two largest clients, AT&T and T-Mobile. While not as dramatic as in the first half of 2010, we continue to see telco and wireless sector aggressively growing offshore, while reducing onshore volume to reduce their overall costs.

In 2010, we had a significant impact to our revenue and margins and expect this headwind to continue into early 2011, although to a lesser degree. Fourth quarter revenue from our largest client, AT&T, decreased 6% from the prior quarter, and full-year revenues declined 4% in 2009. This decline was the result of their offshore migration and the loss of a wireline program announced earlier in the year. Our AT&T mobility relationship remains strong, and we continue to win new programs there.

Quarterly revenues from T-Mobile, increased 4% sequentially, and FTE grew 8% year-over-year due to growing programs in the Philippines. Despite expanding FTE and our growing share year-over-year, T-Mobile revenues declined 23% due to site closures in North America and lower offshore bill rates. Last quarter, we mentioned that T-Mobile initiated an RFP process to reassess all of their vendors and contracts serving their consumer line of business. We are pleased to report that recently we were selected as a finalist in that process and are in active price negotiations to retain our business there. While T-Mobile continues to award us new programs, as recently as last month and we are optimistic that we will renew our contract, until a contract is finalized we cannot be absolutely sure of the outcome.

The rest of our [brace] grew 10% over last quarter as a result of newer programs awarded to us because of our good performance and new clients signed earlier in the year. We see this as a very positive sign and believe that growth in our embedded base and new client sales should provide revenue growth into 2011 to help offset the effects of site closures and offshore migration.

On page seven, we turn to the operational accomplishments for the quarter. As mentioned earlier, we continue to close sites in North America to right-size our operation there. During the quarter, onshore FTE declined by nearly 100 as we closed our Sarnia, Ontario site as scheduled in December. Additionally, in December and January we completed our site consolidation in Greeley and Grand Junction and the ramp down of our site in Alexandria, Virginia.

For the quarter, our onshore gross margins were disappointing at 11%, well off our target of 20% due to site closure expenses and utilization rates of only 68%. Our offshore operation continues to ramp nicely during the quarter.During the quarter, we added over 500 FTE, closing the year with nearly 2,100 FTE, a 30%-plus sequential increase and a 241% increase from the fourth quarter of 2009. The offshore operation return to profitability, producing 6% gross margins for the quarter on utilization of 57%. We would expect offshore margins to continue and improve as we add more FTE and utilization approaches the target of 100%.

Page eight talks to our sales efforts for the quarter. Last quarter, we talked about adding sales directors to bolster our sales teams. In January, we continued this effort by announcing the appointment of Sheila Fisher as our new SVP of Sales. Sheila comes from -- comes to StarTek from ACS, a division of Xerox, with extensive call-center sales leadership experience. Prior to ACS, Sheila held various leadership positions at CyberRep and Sykes. We're pleased to have been able to attract such a seasoned sales exec with an outstanding BPO track record.

During the fourth quarter, we signed two small client contracts, one in the technology sector, the other in the telco sector. Recently, we also signed a sizable contract with a well-known cable provider for over 200 FTEs, with significant potential for expansion. As a result of new sales directors and new leadership, we expect to continue to add new clients throughout 2011 with a primary focus on the cable and technology sector and a secondary focus on e-retail, energy, and healthcare.

Finally on page nine, we identify our four significant other accomplishments. First, realizing that our revenues would continue to fall due to site closures and lower revenue [receipt] on our offshore operations, we initiated an aggressive cost-reduction program in our corporate and field operations. As a result, we took a $1.2 million severance expense in the fourth quarter and expect that these actions will result in an annual savings of approximately $4 million.

Second, during the quarter, we stepped up our investor communication initiatives to ensure that investors understood our long-term investment thesis. Third, we continued to roll out our agent portal, a new internally developed application that will help agents and supervisors track performance and assist agents in solving customer issues by providing more information at their fingertips.

Finally, during the quarter, we initiated a search or CTO to have all of our technology initiatives. We believe that this is an important hire given the growing importance of technology in our business and the need to provide new technology solutions for our clients. These solutions will include hosted applications, multi-channel platforms for IVR, chat, e-mail, and social media, as well as speech and data analytics. With that, I would now like to turn the call over to Dave Durham, our CFO, who will discuss in more detail the fourth quarter and full-year 2010 financial results.

Thanks Larry, and thanks to everyone for calling in. Our financial results for the quarter came in a little bit below where we expected, both on the top line and in terms of gross profit, the result mainly of site closures and program ramp downs that we knew about, but that occurred more quickly than expected. We had a very nice revenue uptick in our offshore business and very strong incremental gross-profit gains there due to higher utilization and lower training costs. SG&A expense increased mainly due to severance expense incurred at the end of the year, and to a lesser extent, investment in our sales and IT organizations.

So, moving onto the details outlined on page 11 of the presentation, revenue for the fourth quarter totaled $64.7 million, down 1.4% compared to last quarter, and down roughly 11% compared to the fourth quarter of 2009. Gross margin was 9.7%, reflecting what we believe will be our low point, as we expect offshore margins to continue to expand and as the effect of our North American site closures and consolidations take hold. SG&A totaled $11.8 million or 18.2% of revenue, up compared to last quarter and compared to the fourth quarter 2009. The increase was due mainly to severance expense of approximately $900,000 that was part of an expense-reduction effort in the fourth quarter intended to reduce our future SG&A spend to approximately $10 million per quarter.

We reported an operating loss before impairment and restructuring charges of $5.5 million, compared to a loss of $3.7 million a quarter ago. We incurred impairment charges of $1 million in connection with sites whose future cash flows did not support the carrying value of their assets. And we incurred restructuring charges of $600,000 in connection with the closure of our Sarnia location, as well as the consolidation of our two Grand Junction facilities.

The net loss for the quarter totaled $6.6 million, or $0.44 per share. Excluding severance expense and impairment restructuring charges, our loss would have been $0.24 a share. Slide 12 provides a bridge from Q3 that helps explain the major elements contributing to our revenue and gross profit declines.From a revenue perspective, the continued ramp of our offshore segment incrementally contributed $2.1 million, offset by expected declines related to site closures and the ramp down of a large wireline program announced in the second quarter.

Our North American wireless business, excluding site closures, also declined, but only by 18 FTE and $400,000 in revenue, a much slower rate than in recent quarters. The $2.1 million offshore revenue increase drove a $1.1 million sequential improvement in offshore gross profit, representing marginal profit of 52%. This sequential growth profit increase is perhaps the most significant metric in this quarter's results, as it demonstrates the earnings power in offshore platform. Going forward, we believe future offshore revenue growth will deliver similar incremental profit margins.

For the year, revenue totaled $265.4 million, an 8.2% decline compared to 2009. More significant was the gross profit decline, which fell by $21.4 million and gross margin, which fell from 17% in 2009 to 10.4% in 2010. SG&A was flat, but grew as a percentage of revenue to 16.3%. The decline in gross profit and flat SG&A translated to an operating loss before impairment and restructuring charges for the year of $15.6 million.This compares to 2009 operating income of $5.9 million.

Clearly, these results are disappointing to you and to us. However, many of the decisions that led to these lower results were conscious ones that we believe were necessary to sustain the business long term. Slide 14 as a good illustration of that, as it outlines the change in annual revenue and gross profit from 2009 to 2010. Our conscious effort to rationalize our North American platform led to closures in Victoria, Laramie, Thunder Bay, and Sarnia, as well as a [Klein]-imposed ramp down in Alexandria. Combined, these actions negatively impacted revenue by $25.3 million and gross profit by $1.8 million, but actually contributed 90 basis points of positive gross margin. We expect these actions to lead to better North American utilization and better margins in 2011.

Offsetting the revenue drop associated with our North American site rationalization strategy was the growth in offshore, which contributed 1,000 incremental FTE and $21.8 million of incremental revenue. Program ramp costs and low utilization early in the year translated to an annual decline in gross profit of $2.3 million and a 200 basis point drop in gross margin. Looking ahead, we expect this segment to continue to contribute to strong top line growth, but with incremental profit contribution in the 50% range as we head towards our 90% utilization target and 30% gross margin target for that segment. What we didn't anticipate going into the year was the significance of the decline in North American call volume delivered by our large wireless and wireline customers, which combined, caused revenue to drop $22.6 million and gross profit to decline by $8.8 million. While the decline slowed in the fourth quarter, particularly in the wireless sector, this is a risk that we will continue to watch closely.

Before moving onto the balance sheet, I'd like to mention that slides 22 and 23 of the presentation highlight our historical revenue, gross margin, and utilization mix by segment for the last three years. We have been publishing this information separately for some time, but believe it is important to highlight here as it outlines well the dramatic geographic revenue and margin mix shift that is underway, and that we believe will 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 the year with cash investments totaling $18.7 million and no debt.Working capital totaled $45.8 million, and our current ratio was 2.4 to one. CapEx for the quarter totaled $3.2 million, and depreciation expense totaled $4.3 million. In terms of cash flow, EBITDA was negative, $651,000, but excluding $1.2 million in severance expense in the quarter, would've been positive by $0.5 million. With that, I will turn the call back over to Larry.

Thanks, Dave, for that update. I'd now like to discuss our strategic focus areas and financial outlook for 2011 starting on page 17. 2011 will be focused on restoring our profitability to 2009 level and on growing our business through new sales.

While 2010 gross margin deteriorated for all of the reasons mentioned earlier in the call, we expect to restore margins to normalcy through the following four efforts. First, to continue to increase our percentage of offshore revenue mix while reducing our Canadian revenue mix. Our optimum target revenue mix is 50% for the US, 40% for offshore, and 10% for Canada. Second is to increase our utilization in our offshore operation by continuing to add FTE from our existing clients and through new client sales. Our target offshore margins are 30% on utilization of 100%. Third is to increase our onshore utilization through site consolidation and adding new business. Our target onshore margins are 20% in the US and 10% in Canada on utilization of 80% and 75%, respectively. Finally, we expect to realize operational efficiencies through the many automation and standardization programs that we initiated in the second half of 2010. These initiatives, coupled with an aggressive SG&A cost management, should drive significant margin, EBITDA, and EPS improvements throughout 2011.

I'd now like to focus your attention to page 18. In addition to the profitability, 2011 will be focused on growth. This will require us to continue to win new business from both existing and new clients. As mentioned earlier, our new sales efforts will focus on diversifying our vertical coverage by selling more into the cable, e-retail, technology, energy, and healthcare segments. We expect many of these new contracts to be for our Philippine and Costa Rica operations, which will help to drive higher utilization and margins there.

Finally, our growth strategy assumes that technology will be a more important part of our service offering. Over the next two years, we expect to announce a more expansive set of technology-enabled offerings that will allow our clients to offset labor costs with automation.

Now turn to page 19, where we provide some financial guidance for 2011. First, we expect 2011 revenues to be down 10% to 15% versus 2010, despite new sales, due to site closures, continued softness in the wireline and wireless sectors, and lower revenue that per FTE as we migrate offshore. We also expect that the profitability initiatives that I discussed earlier will drive improved utilization and gross margins and allow us to return to profitability in the second half of 2011.

In closing, on page 20, the key message you should have heard today, are one -- while 2010 was a year of many accomplishments, we were all quite disappointed with the deteriorating revenue and margins. Second, our offshore expansion efforts are progressing very nicely and should be the main driver for growth and profitability on an ongoing basis. Three, North America consolidation will continue and should drive lower revenues, but provide an opportunity for margin expansion. And finally, our newly constituted sales team, we expect to have sales performance to improve, which should drive 2010 revenue growth to offset the revenue headwinds mentioned above and revenue growth and diversification in years to come. So, with 2010 behind us, we all look forward to a more prosperous 2011. Thank you for your time today and I'd now like to open up the call open for questions.

Thank you, ladies and gentlemen.

(Operator Instructions)

Your first question comes from Dave Koning from Richard W. Baird & Co.

Hey, guys.This is Dave [Onbach] on for Dave. When you're thinking about gross margins for the year, can you talk a little bit about the progression quarter-to-quarter?And mainly, what are your biggest headwinds and tailwinds when you're thinking about [FX], T-Mobile contract pricing, and the ramping of offshore revenues?

Sure, yes. Lots of questions there. The margin expansion, as I mentioned in my comments, we think the 9.7% gross margin is going to be our low point and we do expect expansion from there. We also expect our SG&A to be held in check to $10 million or less per quarter for the full year. In terms of specific guidance around what we expect the margin increases to be on the quarter-by-quarter basis, it's probably a little more granular than we want to be. I guess from a modeling perspective, I would just direct you to expand margins in the US and in offshore, just kind of consistent with what we expect and what we've seen in terms of the ramp of FTE in particular offshore.

With respect to Canada, you talked about headwinds and FX, is problematic for us.In that segment of the business, we have forward contracts in place that protect us at roughly $106 million for the first half of 2011. But, we are at the moment naked on the second half. So with spot at roughly parity right now, that is clearly a headwind, lessened in part by the fact that we have obviously lessened our exposure to the Canadian segment. So, the only other comment, I will let Larry share his thoughts, as far as headwinds, I think the biggest uncertainty out there is the North American wireless and wireline demand, which has been deteriorating throughout 2010. It leveled off at the end of 2010, but it's still something that is out there that could negatively impact us going forward.

So the only thing I would add is we gave you some targets of where we think we can get to. Those aren't targets that we will get to by the end of 2011. But I think we will make significant progress toward those, quarter by quarter. The site closures that we completed in January and February will help the North American margins continue to pick up. And, I think the offshore ramping will continue and that will help the margins to pick up. So, the two big segments of US and offshore, I think we'll continue to drive the gross margins and in a positive direction. The speed of that will be driven by how many more FTE we can sell into the North America and the offshore operations. And, Dave mentioned how much downturn we continue to see in the US sites.

As far as pricing pressure and T-Mobile pricing you mentioned, we continue to be very optimistic about our ability to negotiate that contract. We will be seeing some pricing pressure as a result of that, but nothing that I think would significantly move the numbers from a modeling point of view.

Excellent.If I could follow up real quickly. Sorry if I missed this during the call, but do you expect any free cash flow generation during 2011, or any extra site closures?

Yes, there are a couple of locations where, we -- I don't want to use the term on-the-bubble -- but there are still a couple of sites that, if we aren't successful selling new business into, we may have to make a hard decision to exit . It's not our intention at this point, and not our desire, and we are actively trying to get utilization in those locations to the level that we think is appropriate.

With respect to free cash flow, one of the benefits of having lower revenues, albeit with higher margins, is the fact that it requires less working capital.So, we do expect to generate some pretty healthy cash flow in the first quarter of 2011 and then each of the subsequent quarters as well. So, we do expect that to turn positive in a pretty significant

Excellent. Thanks for taking my call.

Yes.

Your next question comes from the line of David Cohen with Midwood Capital.

In your financial outlook, you indicated expectation returning to profitability in the second half of 2011.At what line in the P&L?Is that operating income or is that EBITDA? Or bottom line?

I will take that. It is GAAP EPS we expect to generate. And, Larry talked about returning to 2009 levels. I think that is the expectation towards the end of 2011, that we're at a run rate that's consistent with the profitability that we delivered in 2009.

And, what are your expectations for capital you need to invest in 2011?

Yes, 2011 really will be a relatively low year from a CapEx perspective. We expect CapEx to be below $10 million. And, in our current model we are not planning any new site openings but rather, just to focus on getting utilization up in the sites that we currently have in the network.

So your response to the last caller in talking about cash flow, is that cash flow expectation net of CapEx, or is that operating cash flow you are talking about?

That's real cash, free cash flow net of any CapEx expenditures that we've made.

Okay, and Larry, you responded to the question about T-Mobile, saying you could expect to see some pricing pressure.What about the scope of that contract and the number of FTEs?What kind of share with that client have you effectively maintained or hope to maintain?

We don't know enough to share it.But I think it is highly likely that we will maintain the current share level and we are hoping that we will continue to grow share as we have in the last two years. So, there are several programs on the bubble that once we are in the contract pool, or once we have been selected as a vendor and have the contracts all locked down, obviously there are other vendors in the pool, but there may be some reallocation that goes on there.

But the way we're thinking of it as maintaining our existing FTE and some new programs that we just recently won.So, I think we'll continue to kind of advance here. How aggressively we'll win more business, I think is still up in the air. We're waiting to get through the contract process, and then those discussions will start.

All right. Thanks, guys.

Yes, thank you.

Your next question comes from the line of Ben Rosenzweig of Privet Fund Management.

Hey, this is Ryan Levenson. I'm with Ben, here. I just have the first question. Ben has a question after me. I just want to focus a little bit on this quarter's CapEx. In Q4, CapEx was $3.2 million.In Q3, CapEx was $3.2 million, and it was broken out that $2 million was attributable to the build out of Ortigas.

In your Q3 conference call, Larry, you were quoted as saying CapEx for the quarter was $3.2 million. $2 million of that was the completion of the current phase of our Ortigas facility. 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 flow. We do expect margins to expand.We do expect EBITDA, both in just nominal dollars and as a percentage of revenue, to improve. So I don't see cash really deteriorating from here.

I'm just hoping that you can help me close the loop here.It doesn't appear that there were any incremental seats added at Ortigas this quarter. So I'm just curious how the elevated capital spending fits into the picture.

Yes, it really wasn't elevated CapEx.It was basically flat, slightly less. The $16.9 million that we spent for the year is consistent with our comments that suggested we would be just slightly below $17 million. So, I think we were pretty dead on in terms of the commentary.

The spend that occurred in Q4, much of it was related to technology spend that was client driven. That was to get our -- the remaining sites for one of our large clients onto our voice over IP network.So, that was an investment that was a little bit higher than we had expected going into the quarter, but again, it was really driven by a client demand and we couldn't not make the investment. So, --

It was not site related, I guess is the point.

I missed that.It wasn't what related?

Site related.

Site related.What was it?

We just said it was technology investment to put voice over IP in two sites that was driven by client needs.

Okay. Later on in the Q3 call, Larry, you said that $2 million per quarter should be the run rate CapEx.Is that still accurate, or is it this new $3.2 million number?

Yes, and I think in my comments, or my response to the question that I think David, or that the Baird representative asked, we said it will be below $10 million for 2010. So, $2.5 million a quarter is currently what we're looking at as we move forward.

Okay, can you just explain -- can you help me break down what -- I guess it's now below $10 million, somewhere between $8 million and $10 million, based on your Q3--a combination of your Q3 comments and this quarter's comments. I'm wondering if you could maybe give us a general breakdown of what that is?

Yes, it's primarily technology investments. I would say two-thirds of that is technology related -- both from an infrastructure perspective, meaning, the current, again, continuing the migration to a voice over IP platform that obviously requires license cost to do that -- as well as internal software development activities that are for initiatives that are intended ultimately to lower our site operating and site fixed costs and get our costs down on a per-seat basis. Those are investments that we have been making that we have started to see the benefit of through our agent portal, which has made our supervisors a lot more efficient, which has allowed us to basically lower headcount in other areas because our supervisors are now able to take on more activity. So that is the bulk of the spend, and the rest is really just routine -- I'll just call it site maintenance of the facilities that we have throughout our networks, and just making the normal leasehold improvements that are required for those facilities.

So, really all of this CapEx should yield lower SG&A?

That's the expectation, absolutely.

I'd say lower SG&A, but probably better gross margins because it will lower our site operating expense as a percentage of revenue.

So better gross margin and lower SG&A?

Yes, you got it. And I would say we're very disciplined about prioritizing our initiatives to ensure that they're prioritized based upon maximizing the return on investment and delivering those types of improvements.

Hey, guys.It's Ben. I appreciate you taking the time. Just a quick question on the SG&A fund. I just want to make sure I'm looking at this correctly. So, $11.8 million total including the severance of $900,000. Would you say that $10.9 million is that run rate SG&A?

No. So, well first of all, just kind of speaking to the incremental increase, call it $10.5 million to $10.9 million, going from Q3, to Q4, we did make investments in our sales organization and in our IT organization to support obviously the sales efforts but also some of our technology improvements. On a go-forward basis, we are expecting SG&A to be at or below $10 million per quarter for 2011.

Okay. So, at most $40 million in 2011 SG&A.But then when you couple that with the commentary and the outlook of 10% to 15% sales declines from 2010 to 2011, you are looking at maybe revenue in the high $230 millions and then that $40 million in 2011 SG&A.That's still 17% or so, correct?

Yes. I mean it is not what we want to be as a percentage of revenue. And, I think the operating leverage that we would get off that would come probably beyond 2011 in terms of a percentage. But it does reflect a 10% decrease, roughly, from what we've spent this year. And, the missing piece to that analysis is we do expect much higher gross margin and gross profit dollars on that lower revenue number.

Okay. Just one last question. With respect to the consolidations in the US and the closure of Sarnia, I think last time I spoke with Dave, you told me that Sarnia had about 400 seats or so. I was just trying to reconcile the Sarnia closure with the US facility consolidations, and I see from the chart, there are only 49 less total North American seats. I was trying to figure out that --

Yes, so we do not take the seats out of the mix until we have actually exited the site. So, you will see that decline in Q1 of 2011. Are you referring to the seat count on the financial scorecard?

Yes. I just didn't know because it says end of period. So I assumed that was reflected --

Yes, it was literally the last day of the quarter that we exited and that we completed the consolidation of our two Greeley and two Grand Junction locations. You will see a big drop in 2011.

I am assuming that it wasn't fully exited until the last day of the quarter, that that's why it didn't yield any sort of utilization.

Right, exactly.

Okay, so that should be taken fully effected in the first quarter?

Yes.

And Greeley and Grand Junction.

Okay. Thanks for the time.We appreciate it.

Yes, thank you.

(Operator Instructions)

You have a question from the line of Arnie Ursaner from CJS Securities. Mr. Ursaner, your line is

Okay, thanks. I want to focus on your slide 17, where you have utilization and gross margin mix targets.Given that you've indicated we're probably not going to get there by year-end, I'd like to try to understand as a follow-up to Ryan's question, how we're going to build for that. Right now, the facts you gave us are that you're international utilization is 57%, and you have 6% margin. North America, you're at 68% and a 11% margin. Focusing on those two numbers, given the closures in North America, what will we look like for utilization at the end of Q1?

Yes, again, I think we've been pretty consistent in prior quarters, not to get that granular, but I think the expectation would be that towards the end of '11, we would be getting relatively close to the 80% number in the US.Canada is a little bit harder to predict at the moment only because there are a lot of moving parts associated with that one and the uncertainty around FX, particularly in the second half of '11, makes that a tough one to predict. We will not be at 90% utilization and 30% gross by the end of '11 in our offshore segment unless we close and ramp some significant programs in really, our Ortigas site.

Well, that was my next question.You mentioned a 10% to 15% decline in your expected revenue, and that includes the wins that you've already got. So, two questions related to that.One, what do you assume for T-Mobile embedded in that?And number two, to get anywhere near the utilizations that you've talk about, how many seats do you have to win in the upcoming few quarters to get close to that?

Again, we won't give you a map.We'll give you some direction here. First of all, going back to your earlier question, which I think plays to both.

In North America, the closure of the three sites, which as we've said earlier isn't reflected in the utilization numbers, should give a nice uptick in utilization for North America in the first quarter and then continue to get better in the second and third quarters. So, I think you'll see gross margin expansion in the first quarter in the US after you'll see it in offshore. Offshore continues to ramp and that should march its way towards the targets into 2012.

The amount of sales that's required -- I'm not going to you a number.We have a sales target that we believe we can hit. There is natural momentum both in North America and in offshore operations of programs that we've already won. I talked about a new win of 200 seats. And I think that we see very short-term visibility, so continuing to add seats to grow there. The margin expansion assumes both the right sizing of North America and the adding of new business. But I'm not going to give you a target for what that new business is. That's one of the reasons that when we hit the target of where we're going to be at year-end has a lot of variability to it based on what that AT&T and T-Mobile volumes in North America look like as we move throughout the year and what the sales performance looks like as we move throughout the year.

But it is clear for you to approach your goals, you need to sell quite a few new contract wins. Your sales force has to perform reasonably well or very well to get close to your goals.

Yes. The long-term target, yes. To reach the long-term stated target by the end of this year would require very strong sales efforts. To get to what Larry described in his commentary of GAAP profitability in the second half, I would contend that, that is a function of executing well on the new business that we've won and also basically stable embedded base work and not a whole lot of new sales to get to profitability in the second half.

Okay. I'm sorry.Go ahead.

The other thing I would add I think we have a lot of visibility into the current sales pipeline with some pretty good short-term opportunities. Not wishy-washy for later on in the year. In order to make real progress on the revenue line, we need to close those deals in the next three to five months in order to have 2011 revenue effect on us. And I think we've got some pretty good visibility to that.

Okay.Going back to the SG&A question. Assuming based on your view of the performance last year was disappointing.There weren't executive comp bonuses paid, and yet I'm looking at a run rate in Q4 north of almost $10.6 million, if you will, or $10.9 million adjusted even for the one-time severance. How do we get a lower number?I'm assuming somewhere embedded in your guidance for the upcoming year for SG&A you've got some executive comp and you've added senior level --

Yes, so, embedded in our number for 2011 is the assumption that we hit our revenue and EBITDA targets, and that there is a full bonus accrual, if you will, in the budget numbers. What we didn't really discuss at length, in addition to the severance, or excuse me, in addition to the cuts that we made that led to the severance in terms of personnel, we've also taken a very hard look at pretty much every discretionary line item in our SG&A budget to get those amounts down to the levels that we talked about. So, it's not a pure math exercise of taking out the headcount and then looking at the run rate. We have made a conscious effort to make significant cuts in a number of places.

Let me be a little more specific. We have committed to you, just now, and to the board that we would take $4 million of our SG&A run rate and that is net of the bonus accrual that you're talking about. So, yes 2010 had less. 2011 will have more in that assumption. So we had to cut more than $4 million just to make the gross number.

I think that's a testimony to the earlier question.Yes, we don't like being at 17% SG&A any more than anybody else does. But we did take a very aggressive swing at it.And I think we're at levels that we're comfortable with while still investing in sales and some technology and clearly, if the revenues continue to decline and fall in other areas, we'll do it again if we have to. But I think we feel we're well positioned at the $40 million SG& A rate.

Let me ask a final question. In terms of the annual savings of $4 million, have you already taken the actions you need to take or --

Absolutely.

So they're already done, so you're confident you can achieve them?

First quarter, you'll see it.We're halfway there.

Okay, thank you very much.

We have no more questions.I would now like to turn the conference over to Mr. Larry Jones for any closing remarks.

Thank you for all your good questions, and we'll talk to you next quarter. Thanks.

Ladies and gentlemen, that concludes today's conference.Thank you for your participation.You may now disconnectHave a great day.