Startek Inc (SRT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 StarTek, Inc. earnings conference call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of the conference. (Operator Instructions). At this time, I would like to turn the conference over to your host for today's call, Ms. Julie Pierce. You may proceed, ma'am.

Thanks, Jeremy. Good morning, everyone and thanks for calling in. I am Julie Pierce, StarTek's Director of SEC Reporting and Investor Relations and it is my pleasure to welcome everyone to StarTek's first-quarter 2011 earnings call. I am joined on the call today by StarTek's President and Chief Executive Officer, Larry Jones and Chief Financial Officer, David Durham. Larry and David will deliver prepared remarks today with some brief comments about this morning's release. At the conclusion of their prepared remarks, they will conduct a question-and-answer session.

For those of you who have not yet received a copy of today's earnings press release, please go to www.startek.com where you can download a copy from the 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 2010 Form 10-K posted on our website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections.

Further, our discussion today includes some non-GAAP measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurements. These reconciliations can be found in the appendix of the earnings call PowerPoint presentation and on the Investors page of our website under Regulation G. I will now turn the call over to Larry Jones, StarTek's President and CEO.

Thank you, Julie. Welcome, everybody. As in previous quarters, please feel free to follow along with the presentation posted on the website. This quarter, we are going to start with a historical and industry perspective in order to provide greater insight into our offshore efforts and to give context to our results. It is often easy during a turnaround process to lose perspective of how we got here, so we feel it will be beneficial to walk you through our recent history and current strategy in a little more detail. Overall we feel our recent results are evidence that our site optimization strategy and offshore expansion efforts are gaining traction.

On page 4 is a timeline of the transition that StarTek has gone through in the past 10 years. They represent three distinct phases of our history -- the founder transition era, 2001 to 2006; the turnaround era, 2007 to 2009; and the offshore migration era, 2009 to present.

The founder transition era was a period when the Company transitioned from a founder-run company to a company run by an independent Board and an outside CEO. During this period, the Company had two CEOs with a focus on growth, cost containment and on paying quarterly dividends. By the end of this period, the lack of investment in both operations and in offshore expansion started to negatively impact StarTek's competitive position. In addition, the loss of key executive talent and cuts to operational infrastructure led to serious operational difficulties in late 2006.

In January of 2007, I was appointed as CEO. During this turnaround period from 2007 to 2009, the focus was on rebuilding the executive team, reinvesting in operating infrastructure and growing revenues. By 2009, the Company had grown to $289 million in revenue, posted $24 million in adjusted EBITDA and had the operational and corporate infrastructure for continued growth.

In 2008, the Board and management realized that to maintain competitive advantage an offshore expansion strategy was required. In late 2008, we opened our first Philippine sites. Shortly thereafter, we began to explore potential geographies in Latin America. And in 2010, we opened a site in Costa Rica.

While our expectation at the time was that half of this offshore growth would come from new business, the general economics and wireless downturn accelerated the move of our clients offshore. This resulted in rapid offshore growth, a good thing, but also reduced volumes in North America and the need to rightsize our US operation. At the same time, Canadian wage inflation and FX rates made most of our Canadian sites unsustainable requiring more site shutdowns. As a result of all three of these factors, in 2010, we reported a very disappointing financial result that we discussed in our last call.

Turning to page 5, let me talk a little bit about the others who have gone through this same offshore migration. Nearly every competitor of ours experienced revenue and earnings deterioration during two to four year offshore migration periods -- Teletech and Sykes in the early 2000s, ICT in the mid-2000s and APAC in 2005 to 2008. While every one of these competitors experienced financial challenges as they dramatically downsized their North American operations and invested in new offshore locations, they all exited this period a stronger enterprise with significantly improved growth, margins, cash flow and stock price.

While we are still in the middle of this migration period, we are seeing evidence that we are nearing the end. Site closures are slowing, margins are improving and the need for capital expenditures on new sites is diminishing.

Predicting exactly when we will complete this period is difficult. North American demand continues to be uncertain, which would drive the need for further site closures. New sales, while certainly on the rebound, are unpredictable and subject to market conditions. We do feel though that we are well past the midpoint and headed in the right direction. Our expectations are that, in 2012 as news sales improve, site closures end and site utilization approaches our goal of 80%, we too will enjoy the higher growth and profitability in line with industry norms.

I'd now like to point you to page 6 of the presentation where we highlight our financial results for the first quarter. Dave will cover these numbers in more detail, so I will be brief. Revenues for the quarter were $59.5 million, representing an 8% decline from the prior quarter and a 12% decline from last year. Gross margins for the quarter were up nicely to 12.4% and SG&A was down to 9.7% due to our ongoing cost reduction programs.

Adjusted EBITDA improved to $2.1 million, driven by improved gross margins and lower SG&A. Net loss for the quarter also improved $2.6 million or a net loss of $0.17 a share. Our balance sheet remains strong as we closed the quarter with $20 million in cash and no debt.

Turning to page 7, while we continue to experience softness in demand for seats in the US and Canada, offshore demand remains strong in our existing clients, as well as new sales prospects.

First-quarter revenue from our largest client, AT&T, decreased 5% from the prior quarter and represented 65% of our total revenue in the first quarter. This decline was a result of AT&T continued offshore migration and the ramp-down of their wireline program. Our AT&T Mobility relationship remained strong and we continued to win new programs.

Quarterly revenues from T-Mobile decreased 22% sequentially due to the recent site closures and represented 16% of our total revenues. Despite the decreases in the quarter, our relationship with T-Mobile has never been stronger and we continue to be awarded new programs in the Philippines that should provide future FTE and revenue growth for the account. The new contract negotiations are in their final stages and we expect a positive outcome for both sides.

We have received a number of inquiries about the impact on our business of the recently announced AT&T acquisition of T-Mobile. Given that both parties are in a quiet period, there are very few specifics being discussed. However, in the short term, we believe that there will be minimal impact on our business as a result of the transaction. Even when the deal is closed, we expect a slow and methodical integration of both companies' operations and our large presence with both companies should play a role in mitigating the impact on any potential vendor consolidation effort.

We lived through a similar integration when AT&T acquired Cingular in 2007 and expect that this will be a multi-year effort and that we are well-positioned given our strong relationship with both companies.

Revenues from the rest of our base were flat versus the prior quarter as growth in some clients was offset by lower volume in others.

On page 8, we turn to the operational highlights of the quarter. As mentioned earlier, we continue to close sites in North America to rightsize our operation there. During the quarter, we closed the Alexandria, Louisiana the site and announced a ramp-down of our Cornwall, Ontario operation. As a result of these and prior closures, utilization rates improved both in the US and Canada driving nice improvements in gross margin across both regions.

Our offshore operations continue to scale nicely with first-quarter revenues representing 34% of our total seats and 20% of our total revenues. Offshore gross margins expanded to 11% on utilization of 55%.

Our overall operation continues to improve as a result of the many global standardization and efficiency initiatives started in the second half of 2010. While many of these improvements are difficult to see given the utilization-driven improvements, we are seeing lower attrition, lower site costs and improvements in variable margin across all of our client programs.

Page 9 highlights our sales accomplishments for the quarter. At the beginning of the quarter, we announced the appointment of Sheila Fisher as our new SVP of sales and while it is hard to give Sheila credit for all the fabulous bookings this quarter, she was very impactful in closing the three new contracts, which totaled over 500 FTE and $10.75 million in annual contract value.

These deals were not only significant in size, that is it's our largest booking quarter in a long while, but also in the mix of clients. For more than a year, we have focused on furthering our penetration into the cable market and I'm pleased to report that the largest deal in the quarter was with one of our smaller existing cable clients for a technical support program in the Philippines. We have also focused on expanding our vertical market coverage. I am also pleased that the other two contracts signed in this quarter were for well-known brands in the technology and online media sectors.

And the sales momentum continues in the second quarter. Recently, we signed another contract with the same existing cable client for an additional 200 seats and approximately $8 million in annual contract value for a sales support program in the US and Costa Rica.

While we are pleased with the booking results, we are also executing on a number of marketing and branding programs to ensure an ever-growing pipeline of leads that will drive future sales.

Turning to page 10 where we identify our recent accomplishments, this week, we announced the appointment of Mark Veyette as our new CTO and SVP of Information Technology. Mark will be responsible for all of our technology initiatives, including network and systems infrastructure, new client solutions and our overall future technology roadmap. Mark has an extensive industry experience having led major technology initiatives at AT&T, EchoStar and T-Mobile. We are very excited to have Mark on board.

With that, I'd now like to turn it over to Dave Durham before I come back and talk about strategy who will discuss a little more of the detail of the first-quarter results.

Thanks, Larry, and thanks to everyone for calling in. We are quite pleased with our financial results for the quarter. Our top line came in as expected. Gross margin improved significantly compared to last quarter. Our fourth-quarter cost cuts resulted in lower SG&A expense. Adjusted EBITDA margins turned positive and our quarter-end cash position increased to over $20 million. Though we still have work to do to get back to positive EPS, this quarter was a very important and positive step in the right direction.

So moving onto the details outlined on page 12 of the presentation, revenue for the first quarter totaled $59.5 million, down 8% compared to last quarter and down roughly 11.7% compared to the first quarter of 2010. Even though revenue was down, gross profit dollars were up compared to last quarter and compared to the first quarter of 2010 and gross margin improved to 12.4%, a 270 basis point improvement compared to last quarter and a 180 basis point improvement compared to Q1 of 2010.

SG&A totaled $9.7 million, the lowest level in eight quarters, a decrease of $2.1 million compared to last quarter and a $1.2 million decline from the year-ago quarter. Roughly half of the decrease compared to last quarter was due to the absence of severance expense that we paid in connection with several overhead position cuts. The remainder of the decrease was the result of those same salary cuts, plus a reduction in other discretionary line items.

Higher gross profit and lower SG&A expense translated into a narrowing of our operating loss to $2.3 million for the quarter compared to an operating loss before impairment and restructuring charges of $5.5 million last quarter and a loss of $3.8 million in the first quarter of 2010. On a per-share basis, we lost $0.17 this quarter compared to a loss of $0.44 last quarter and $0.21 in Q1 of 2010.

Slide 13 provides a nice bridge from Q4 that illustrates the underlying strategic elements leading to the revenue decline and more important, the gross profit improvement. Site closures in Alexandria, Louisiana and Sarnia, Ontario accounted for an expected $6.5 million decline and lower call volumes from our wireline customers added another $300,000 decrease.

From a gross profit perspective, however, the site closures only cost us $500,000 in sequential gross profit and improved overall gross margin by 30 basis points compared to the fourth quarter 2010.

Similarly, through site consolidation efforts and good management of site operating and site fixed costs, gross profit from our wireline clients improved by $600,000 and improved overall gross margin by 100 basis points.

Offsetting the site closure and wireline revenue declines was an increase in revenue from our North American wireless customers and the continued ramp of our offshore location.

North American wireless revenue increased by $900,000. Gross profit was up by $400,000 and gross margin improved by 50 basis points. Offshore FTE was actually down slightly due to seasonality, but through better agent productivity, we generated $300,000 of incremental revenue and $600,000 of incremental gross profit and a 90 basis point pickup in overall gross margin. In total, on a revenue decline of $5.2 million, we generated $1.1 million of incremental gross profit and a 270 basis point improvement in gross margin.

The change in current quarter revenue and gross profit compared to Q1 of 2010 outlined on slide 14 highlights the dramatic impact of our site optimization strategy as our North American site closures negatively impacted revenue by $9.4 million, impacted gross profit by $500,000, but improved overall gross margin by 80 basis points.

North American wireless revenue declined $3.2 million year-over-year and impacted gross profit by $1.9 million and gross margin by 250 basis points. This downward trend has slowed in recent quarters evidenced by the uptick in revenue compared to Q4, but this trend still remains the biggest risk to the business. We are working hard to mitigate any significant future impact through new North American sales.

The wireline business executed out of Greeley, Grand Junction and Lynchburg combined for a revenue decline of $3.2 million, but due to our consolidation efforts in Greeley and Grand Junction, and effective cost management in Lynchburg, there was no negative impact on gross profit and overall gross margin improved by 60 basis points.

As expected, the most dramatic change on a year-over-year basis was the successful ramp of our offshore locations, which incrementally contributed over 1350 FTE, $7.4 million in revenue, $2.5 million of gross profit and a 230 basis point improvement to overall gross margin. We are now profitable in both Philippine locations, approaching breakeven in Costa Rica and look for even more dramatic year-over-year improvements in the second half of this year.

Also contributing to our improved results this quarter was a decrease in selling, general and administrative expenses. Slide 15 presents some interesting historical perspective and insight into the expected decrease for 2011.

For the period dating back to 2006 through 2010, SG&A grew by approximately $13 million from $30.2 million in 2006 to $43.3 million in 2010. There were several contributing factors and digging into the details really helps explain the increase.

The first was a non-cash option expense of $2.1 million, which, prior to 2007 and the implementation of FAS 123R, was not expensed at all. We also paid $1.2 million in severance in 2010 associated with cost-cutting efforts after incurring none in 2006 and we paid incremental bonuses of $1.2 million in 2010. Absent those three expense categories, what we define as corporate SG&A, that expense increased by only $300,000 from 2006 to 2010.

The remainder of the $13 million increase, about $8 million, and as Larry alluded earlier when he talked about our need to invest in operations infrastructure, $8 million relates to operations support in the areas of HR, recruiting, operations management and other operations support services. These functional areas, which many competitors treat as cost of sales, have been cut to the bone in 2006. And in order to support a revenue engine that was beginning to grow again, we made a significant investment in these areas beginning in 2007.

At the end of 2010, recognizing that we will have a smaller North American footprint and for the time being, a lower revenue base, we took aggressive action to rationalize our corporate spend, streamlined our operational support functions while continuing to invest in sales and certain technology initiatives. These actions are expected to translate into 2011 SG&A expense of approximately $38 million, a 12% reduction from the $43.3 million spent in 2010.

Moving onto the balance sheet and cash flow highlights on slide 16. The balance sheet remains strong at the end of March with cash and investments totaling $20.4 million and no debt. Working capital totaled $49.2 million and our current ratio was 3.1 to 1. CapEx for the quarter totaled $1.9 million and depreciation expense totaled $3.9 million. With that, I will turn the call back over to Larry.

Dave, I appreciate your comments. Earlier, I discussed the historical and industry perspective of our current offshore migration. Starting on page 18, I'd now like to talk to you about the specifics of our go-forward strategy and some of the 2011 focus areas. The Board and management have embraced the simple three-point plan -- grow sales, restore profitability and make selective investments. While there are a lot of trade-offs, we are focused on balancing all three of these objectives to drive long-term shareholder value.

On page 19, we highlight our strategy for growing revenues through new client sales, as well as adding new programs from our existing clients. As mentioned earlier, our new sales team has some impressive recent wins. In order to meet the goal of $30 million of new bookings this year, we will need to manage and grow the pipeline of new deals. This will require us to continuously add new sales executives, execute new and exciting marketing programs and broaden our vertical reach into higher growth sectors like cable, retail, technology, energy and healthcare.

Many of these new deals will also be delivered in the offshore arena in the Philippines and Costa Rica, which will also help us drive improved utilization and margins.

Our growth strategy also assumes that technology will become an ever-growing part of our service offering with new technology-enabled solutions that allow our clients to offset labor costs with automation. Solutions such as hosted call center apps, multichannel platforms for IVR, chat, e-mail and social media, as well as speech and data analytics.

We have talked a lot about restoring profitability in the past and we are finally on an upswing. The pie chart on page 20 shows our onshore/offshore mix and utilization gross margin targets. As I indicated earlier, the timing of getting to these optimal targets will be driven by external factors as much as our ability to execute the plan.

Gross margin expansion is by far the biggest lever to overall profitability. Our gross margin expansion from 9.7% in the fourth quarter to 12.4% in the first quarter demonstrates how margin expansion quickly translates to EBITDA and EPS improvements. Margin expansion will come from a number of factors -- increased offshore mix, reduced Canadian mix, increased utilization across all our regions, an operational focus on variable margin and site cost management and efficiency gained through the automation and standardization of our operational processes.

This multi-focused approach to margin expansion has been and is one of the Company's top priorities. We are quite pleased with these efforts so far, but we have got a long way to go.

But margin expansion isn't enough. We are equally focused on managing SG&A to appropriate levels as Dave indicated. We are continuously balancing cost-cutting initiatives and the funding of necessary corporate, operational and technology spend to sustain the business. And given the major capital improvements required in the offshore expansion are behind, us we are limiting our CapEx spend to $2 million a quarter to drive free cash flow and to grow our net cash position over time.

The third leg of the strategy on page 21 is to ensure that we make the appropriate strategic investments to remain competitive and ensure long-term growth. Our first investment is the identification and development of internal technologies to automate our operations and external technology to expand our service offerings. Our agent portal is only in its first release, but has already driven agent performance and operational efficiencies.

New client offerings are well underway and our goal is to use as many third-party solutions as possible to minimize the investment and reduce the technology risk.

Our second area of investment is the identification and execution of accretive acquisitions that, one, will reduce our client concentration, more important than ever now given the recently announced acquisition of T-Mobile by AT&T; two, the expansion of our vertical reach; and three, building scale to leverage our overhead. Over the past 18 months, we have looked at a number of potential deals with little success. We will continue this pursuit, but be very selective to ensure that any acquisition is accretive and non-disruptive to our current strategy.

Please now turn to page 22 where we reiterate our financial guidance for 2011. We expect 2011 revenues to be down 10% to 15% versus 2010 despite new sales due to site closures and continued softness in the wireline and wireless business and lower revenue per FTE as we migrate our seats offshore. We continue to expect to return to profitability in the second half of 2010 driven by the profitability initiatives discussed earlier that will help drive improved utilization and gross margins.

Wrapping up on page 20, the key messages you should have heard today are one, we are in a period of offshore migration that many of our competitors have gone through successfully in the past decade. We are in the middle of that migration and like our competitors, we expect to exit the period with industry-standard margins and cash flow. Revenues are declining in 2002 due to site closures and migration, but our recent sales wins and more to come should drive future revenue growth in 2012. And third and finally, gross margin improvements will be the biggest lever in restoring profitability and the first-quarter results are indications of things to come.

Thank you for your time today and with that, we would like to -- Dave and I would like to open it up for questions.

(Operator Instructions) Dave Koning, Robert W. Baird.

Congrats again on some good signings in the quarter. I think that is encouraging. I guess I was wondering, was that already factored into your revenue guidance when you last gave it or are those just timings that will be more beneficial into next year really that don't impact '11 that much?

I think a couple of -- a multipart answer to that. One, we had a bookings goal, as I said, of $30 million, so part of that is factored into our expectations. And two, these deals are just starting to ramp, so they are more impactful in the second half of the year and yes, into 2012. So I wouldn't say these are surprises to the plan and if they were, we would have changed our guidance.

Yes, okay. Is it fair to say that given those wins in the pipeline and some of the deconversions that are happening this year with the ramp-downs of centers and shifts to offshore, that a lot is happening this year that is pressuring revenue, but that by next year, is there some expectation that you might grow revenue next year?

Yes, and I think as I said in my closing remarks, I think between the slowdown in site closures, which have really been the big dampening factor and that the incremental growth in the offshore will now be a positive factor and then the new deals, I think you have got some good momentum going into 2012.

Again, one caveat is that the North America wireless and wireline business is pretty unpredictable and therefore, if we did end up with some kind of negative impact on that, that would offset it, but in general, we feel pretty bullish about that.

Okay. Then you mentioned that the T-Mobile relationship is probably as strong as it has ever been. I went back and I know I think in Q2 '08, it peaked -- the revenues peaked at about $19 million and this quarter, it was a little less than $10 million I believe. So it has come down to about half, but I would imagine most of that is just based on kind of the offshore shift and maybe a couple other items. Maybe can you just refresh a little bit on maybe how much of that has gone just from the offshore shift and then is the rest from pricing and then probably just a little bit of lost volume?

Yes, Dave, this is Dave Durham. I would characterize it as being 100% due to the offshore migration. So several of the site closures that we have announced in the last couple of years have been related to that account, but our headcount is continuing to grow offshore and even though revenues are down, margins are up within that account. And we feel like there is a lot of good stuff ahead within that client.

And T-Mobile was one of the first to push the offshore migration and ramp offshore, so a lot of the site closures that we announced, as Dave said, in the last 12 to 18 months were T-Mobile and at the same time, they were ramping up at the other end.

I don't have the number in front of me, but I would say that the FTE between those two periods is probably relatively flat and from here on, like our migration strategy, their strategy would be to raise FTE from here going forward and that should be a positive lift for us.

Okay, that makes sense.

The other point to make is I would characterize the migration to be pretty much done for them.

Okay.

Then from here, we ought to see both FTE and revenue growth and margin expansion.

Okay, great, great. And then I guess just the last thing was, in Canada, I know in the 10-K, you kind of outlined how -- I think you had about a half a year worth of hedges left kind of at the end of 2010 at reasonably favorable rates. With the Canadian currency now about 10% stronger, it seems like that could wipe out the gross margin. Are the closings of centers and the ramp-downs and stuff, is that enough to offset what could be a margin impact from the FX?

Yes, it is definitely a headwind, but I would tell you given the closure of Sarnia and the downsizing of Cornwall, our expectation with the Cornwall location in particular is any continuing revenue that we would have there would be with Canadian clients, which would mitigate the FX risk there. So we are really only down to a couple of locations and at those locations, their margins are better than the rest of the sites in Canada. So it is absolutely a headwind. You are correct that our hedges pretty much expire in the second quarter. We have put forwards in place to protect us kind of where spot is today on part of our exposure, but it is an ugly scenario.

I think that just further amplifies why we are moving away from Canada as fast as we can because we just can't keep up with the wage rate or the FX rate.

Okay, great. Thank you.

Arnie Ursaner, CJS Securities.

Good morning. It is actually Fred Buonocore calling in for Arnie. Just clarify on that goal of $30 million in new bookings, where are we with respect to that goal at this point in the year roughly?

I think we announced the $10.5 million plus the $8 million.

Plus the -- okay, got it. So we are decently over halfway there. You gave some color on what the $10.5 million was made up of in terms of verticals. Is that kind of the mix or split that you expect across that whole $30 million, assuming that you hit that target? Do you expect it to look something like that?

It is hard to say. We have got a pipeline that is pretty diverse and we do have some telco and some wireless prospects in that list. We are not going to turn away business to hit a mix, but I think in general more of our pipeline deals are outside of the traditional verticals we are in and we are seeing some success there for the first time in a long time.

That is great. Then you mentioned in your prepared remarks with respect to M&A activity that you had looked at a number of deals aver the last year and a half or so with not a lot of success. What has been the biggest impediment there? Has it been valuation or things that you start looking under the hood and find that it is not really a good fit or a combination?

It is really a combination. Probably the majority of them aren't right fit for either side, they are broken or they are just not a right mix or they have got too much AT&T, which will decline. So a lot of factors we look at relative to fit and I would say a lot of them fall out of bed there.

Second, we have lost a couple due to valuations. Other strategic buyers are willing to pay more than we are. And then size would be the other one. We have only got so much powder to be able to acquire with and some of them are just out of our range.

Got you. Then in the past, you had talked about this transition of an AT&T wireline program to a provider in India and I think -- I'm not sure if you mentioned this on the call, but I think that was supposed to conclude in April and I am just wondering if that wrapped up or has that been a protracted process and if you see anything on the horizon that could be a similar action to this one.

Sure, this is Dave. Yes, that program has wound down pretty much as expected. We have retained a handful of FTE still supporting that work and we are, at the moment, of the opinion that that revenue will stay for the foreseeable future, which the significance of that is that it keeps us involved in that side of AT&T, which we think is helpful.

With respect to any additional programs that are of a similar ilk, I think we learned a pretty hard lesson with that piece of business and we are attempting to be a lot more proactive with what I will just call back-office lines of business that might be at risk with technology gains and we are trying to get ahead of that by proposing efficiencies through technology to those clients that have that kind of line of business -- have those kinds of lines of business. So long-winded answer to a simple question, but no, we don't really see anything on the horizon similar to that loss.

Okay, great. Thank you very much.

Matt McCormack, BGB Securities.

Good morning. The new wins or the bookings, can you talk about what percentage of that work is going to be performed offshore?

So I think the --

One of the three wins in the $10.5 million is 100% US. Another one is 100% Philippines and the third one is also in the Philippines. The follow-on work that we announced that was signed subsequent to quarter-end, which was roughly $8 million in annualized revenue, that is a split between the US and Costa Rica.

So I guess in general, we are seeing a lot more demand for offshore, I guess that is the strategic question. I would say probably two-thirds/one-third when I look at the pipeline. There is a little more US in there than two-thirds -- than one-third, but I would say our success rate will probably be higher in the offshore.

I think it was encouraging that a decent chunk of the new sales is going to land in North America and we think is pretty sticky if you will.

So that is the type of work that you wouldn't expect would ever get offshore?

Not in the near term.

Okay. And then now turning to offshore I guess utilization, I guess if you could clarify, it looks like utilization went down sequentially although revenue was up and seats were flat. So can you kind of explain what is going on there?

Sure. Yes, so FTE was down a little bit and primarily for seasonal reasons. So our calculation of utilization is purely a function of full-time equivalent agents or FTE divided by the number of available seats. So that was the reason for the decline in utilization. We were more efficient, we did more with fewer people from a productivity perspective and were able to bill basically the same amount of revenue with fewer people.

But coming out of the fourth quarter as we look at these new sales for first quarter, if we look at these new sales, a number of them which are in the Philippines, we should see that continue to rise. I would take the one-quarter flatness not as a trend, but as a seasonal and waiting period until these new deals start ramping up.

Yes, that is a great point. We are absolutely expecting FTE to continue to grow pretty nicely from here in the offshore segment and for utilization to improve.

Okay. Turning to T-Mobile, I know you commented that 100% of the decline is offshore migration. Just in terms of the sequential decline and the comment that that was due to the closing of the facility, so there was no program -- just to be clear, there is no program terminated, that was completely migration-related and if you could just kind of walk us through the timeline because you would think it would be gradual versus just an abrupt event. So help me understand that please.

That is a great point. I wish it was this center is moving to the Philippines over an orderly period. What happens is they give us a program over into the Philippines and then there could be a delay of six months before the other ones close, okay, while you are ramping there. So they are constantly ebbing and flowing FTE not only between us, but other vendors. So in the case of this last quarter, the side we closed down was a program that was almost a horse trade for new seats that were given to us six months ago in the Philippines. So it is not a one-for-one migration. Sometimes there is a lead, sometimes there is a lag, but in general, we are seeing a very positive trend that they want to continue to give us business, sometimes it is the same program, sometimes it is a different program.

Okay. And then just lastly, I know I brought this up in the past, you are talking about strategic acquisitions. Looks to me probably the best purchase you can make right now is your own stock given the valuation. You are talking about migrations ending in '12. So what has to happen, what level of confidence do you need to have before you start repurchasing your shares? And then additionally with your M&A strategy, why not repurchase your shares, get the stock price up and then possibly use that as currency?

Yes, I think, Matt, this is Dave, clearly we need to make sure that we are generating a healthy level of cash flow and we had a nice sequential improvement in our cash position. We expect that to continue to build through the end of the year. And I think it is probably a discussion -- it is a discussion that is ongoing with our Board. And I agree with the notion and the concept of buying shares into treasury at a relatively low price and then reissuing those same shares at a better price in an acquisition opportunity. I think that would be the strategy, but at the moment, we are highly focused on generating free cash flow and continuing to build cash.

Okay. Thank you so much.

Howard Smith, First Analysis Corp.

Good morning, gentlemen. Many of my questions have been answered, but I want to concentrate on North American gross margin, US gross margins for a moment. You are at about 78% utilization with a target of 80% and about 15% gross margin with a target of 20%. So what has to happen, since this doesn't look like it is all going to be through utilization, for the US gross margin to get closer to targeted levels?

Yes, I think two things, Howard. One, at home is an answer where we are typically generating lower variable margin, meaning lower contribution, but due to the absence of site operating and site fixed costs, we are able to generate higher gross margin. And then we also think that 80% is probably -- I think we have said in the past that 80% to 85% is kind of the target.

I think you are correct that we need to get closer to 85% utilization to hit 20% and then the balance is really improvement in variable margin, which is a function of just operating more efficiently on the business that we have and some of the things that Chad Carlson, our COO, is working on, we feel pretty good about the progress that he is making to make up the gap that utilization can't get us to 20%, but we think operational improvements can get us the rest of the way there.

Okay, that is helpful. Just one follow-up on the offshore revenue ramp, you said this quarter is kind of an aberration in terms of the couple million -- or in terms of a steadier growth rate you have seen in prior quarters. Would you expect a material sequential increase in the revenue based on what you have booked and what you have in-house today?

Well, I think looking ahead, I think Larry was pretty clear on the full-year guidance in terms of total revenue. We do expect a little bit of a dip in the second quarter and then we expect to see some pretty nice growth gains each sequential quarter after that.

Okay. I was specifically speaking of kind of just the offshore.

Yes, no, well, offshore I think you will continue to see nice pickups.

Sequentially?

Yes, yes.

Thanks. No problem.

[Omar Similat], Independent [Analysis].

Good morning. First of all, I want to congratulate you guys again. Some people might not be able to see it, but I have been following you guys for some time and I think this is the first quarter where we are seeing some tangible evidence that your strategy actually is working and hopefully, it will continue in the future. So congratulations for that.

My first question is I know that you alluded to more efficiency on the offshore given the little bit lower FTE count, not lower but utilization down a couple of points and I also noticed that the average revenue per FTE increased. So my question is is that due to that same efficiency or --?

Yes, it is. There are a couple of programs that were overstaffed so that we could -- just to make sure that we met the quality metrics that our clients expect and with just I will just say better leadership, better management and some of the efficiency programs that operations is putting in place, it was not necessary for us to overstaff some of those programs as we had done in Q4. So that was the driver there.

So really the average revenue per FTE going forward we should not expect this to be this level I guess. It should be more like last quarter's level, more like in the 6900 --?

No, I think it is fair to expect the revenue per FTE to be the same on the same revenue stream that we generated in Q1. It will change just based upon mix as we start to ramp new programs going forward, but I think if there is an aberration, it might have been Q4 where revenue per FTE was too low.

Got it. Well, that is good. I also noticed an increase in the average revenue per FTE in Canada. Could you talk about -- is that something that we should also model forward or should it be stable there?

It should be relatively stable with the exception of the announcement of our intent to downsize Cornwall. So it is really just a function of mix. There was no pricing impact, but the closure of our Sarnia location really was the driver for that change. I guess you'd expect a little bit of volatility just from a modeling perspective given that Cornwall will be -- a piece of that site at least will be ramping down over the course of the next couple quarters.

I guess the general concept is, across Canada and across our offshore operation, we have got dozens of programs with different revenue per FTE models built into them just based on the type of work. So when we do shut down something, it does disrupt the model a little bit. Sometimes it goes up, sometimes it goes down.

Sure, sure. Okay. Just on Cornwall, the ramp-down, is that around the 400 seats that was I think I've seen some articles talking about? Is that more or less what you're thinking there?

Maybe seats, but not FTEs.

Okay, perfect. Going back to offshore for a second, given that efficiency, we have spoken before about your operating leverage there and how you saw every additional revenue dollar go into gross margin around -- in the $0.55 to $0.60 area. This quarter, I more or less calculated around $0.65, which is stronger than what I had anticipated. So my question is should we expect this $0.65 contribution into gross margin going forward or was it a function of this efficiency?

It is a function of the efficiency. I would not have that expectation on a go-forward basis. I think 50% to 55% variable margin, which is really what we are talking about, is pretty healthy, very healthy. And I don't think you should have the expectation that we will do better than that.

The other thing to kind of think in your modeling is that, as we ramp programs, they are less efficient because you are not getting paid full boat for training. So it does have a dampening effect. Last quarter, obviously, because FTE was flat, there is no training going on, so you'd end up with a pop in efficiency as we start ramping again. But those programs will stabilize at that 50% that Dave talked about.

Okay, that is fair. Are you still on target to try to hit an 80% utilization in offshore by the end of the year?

No, I think that is an aggressive target. And I think we will get close, but I don't think we will quite get there. I don't think we ever said by the end of the year.

Okay. And my last question -- well, do you expect to see the available seat count continuing to shrink in the US and Canada marginally as the year progresses?

I think only based on site closures that we haven't announced yet if we do anymore. I think in my comments I said we will look at site closures on an ongoing basis depending on demand and on profitability. But at this point, I think we have announced everything, so you will see sites -- you will see Canada shrink. We don't have anything in the US that we think will move.

Okay, great. That is helpful. Finally, if you could touch a little bit more on the AT&T mobile merger, how will that affect you positively or negatively? Initially, in my thought process, I think in the short term it will probably affect you even positively because you probably have customers calling in more frequently asking about the merger and how that would affect them. So is that a fair assumption?

Yes, I think there is lots of gives and take. I wouldn't say the number of people calling in is going to move the needle a lot. I think secondly the contract negotiations relative to them bringing in another vendor or something, those are long gone. Third, the contract negotiations relative to our pricing had slowed, so I think that is a slight positive and net net, I think is they are going to continue to operate business as usual. We have got a very strong position. We continue to get new programs. So I think it has minimal impact, but I think the momentum is good there for us.

As I also said in my comments, as you look a year out, anything can happen and we are well-positioned in both companies. We are well performing in both companies and I think it would be expected that, like in Cingular, we end up with at least the same marketshare and hopefully more.

Great. Thank you, guys. Keep it up, you're doing a great job. Thank you.

At this time, I'd like to turn the call back to Mr. Larry Jones for any closing comments.

Well, thank you for your time today. Hopefully, this has been informative. Also thank you for your in-depth questions. We always like to hear what is on your mind. With that, we will close the line and talk to you next quarter.

Ladies and gentlemen, this concludes your conference for today. We thank you for your participation. You may now disconnect and have a great day.