ICT Group Inc. Q4 2008 Earnings Call Transcript

Feb.25.09 | About: Sykes Enterprises, (SYKE)

ICT Group Inc. (OTCPK:ICTG) Q4 2008 Earnings Call February 25, 2009 9:00 AM ET

Executives

Betsy Broade – NBS Value Partners, LLC

John Brennan – Chairman, CEO, President

Vincent Paccapaniccia – V.P. Finance, Chief Financial Officer

Analysts

Howard Smith – First Analysis

Josh Vogel – Sidoti & Company

Shlomo Rosenbaum – Stifel Nicolaus

Bob Evans – Craig-Hallum

William Sutherland – Boenning & Scattergood

Operator

Welcome to the ICT Group Inc. fourth quarter and year end 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Betsy Broade of NBS Value Partners, LLC.

Betsy Broade

Good morning everyone. Thank you for joining us for today's fourth quarter conference call with the management of ICT Group. Since we'll be discussing certain forward-looking statements during today's conference call that are subject to risks and uncertainties including those related to ICT Group's future revenues, earnings and projections, the company claims protection of the Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Now, I'd like to turn the call over to John Brennan, Chairman, Chief Executive Officer and President of ICT Group.

John Brennan

With me this morning is Vincent Paccapaniccia, our Executive Vice President of Finance and our Chief Financial Officer. I'd like to begin by welcoming everybody and thank you for participating in today's call.

I'll begin by reviewing the highlights of ICT Group's fourth quarter performance including key operating and business development initiatives. I'll be followed by Vince who will go over the details of our fourth quarter financials and our guidance for the first quarter of '09. I'll follow up after that briefly with an overall outlook for full year 2009 at which point we'll open up the meeting for Q&A.

In reviewing our fourth quarter performance, in early January we announced our decision to exit the market research business with North American Financial Telesales operation and accelerate the expansion of our right-shore strategy to international operations. In order to provide you further insight into how ICT Group looks after these actions, we have added core business revenue numbers to today's release, and I'll be using this metric in my remarks so that we can compare the progress achieved to date and our outlook using the same base line.

Core business revenue which is comprised of North American customer care, BPO and technology based services and our international operations, totaled $92 million in the fourth quarter of '08, up 1% from last year's fourth quarter, but down 2% sequentially. The rapid strengthening of the U.S. dollar in the second half of 2008 understates the growth we are achieving in our core business.

Measured on a constant currency basis, we achieved 9% year over year revenue growth in the fourth quarter and 4% sequential growth from the third quarter. This is supported by the 15% year over year and 3% sequential increase we achieved in core production volume in the fourth quarter of 2008.

Despite the uncertainties of the global economy, our core business achieved strong growth throughout 2008 as clients sought to reduce infrastructure costs by outsourcing and off-shoring their internal operations.

We achieve sequential growth in each quarter of 2008 in core business revenue, measuring constant currency and in core production volume. By the fourth quarter of 2008, core revenues accounted for 90% of total company revenue compared to 81% in the fourth quarter of 2007. We expect these trends to continue with core revenues accounting for an increasing portion of our total company revenue in 2009.

As you know, we began to implement significant cost cutting programs in the middle of 2008 and in January of this year, announced a second round of major cost reduction initiatives. Vince will give you details later on how these programs have meaningfully changed our cost structure. As a result of these actions, fourth quarter operating results came in within our guidance range. Also, our balance sheet continued to improve. Net cash was $31.3 million and free cash flow for the period was $6.3 million.

Importantly, we believe we have right sized the company to weather this economic downturn and to efficiently grow our business by providing clients with low cost, high quality solutions.

Today's release contains data on the contribution of each of our vertical markets to our core business revenue. As you can see, the major revenue impact of our recently announced strategic initiatives is in our financial services business. This is where we have seen the most volatility since the economic crisis took hold in 2007.

As core revenues within the sector increased rapidly and non core revenue decreased rapidly. In contrast with what may appear to be a weak vertical to some, our core financial services sector revenue totaled $40.4 million in the fourth quarter of '08, up 24% from fourth quarter '07 and up 32% from the fourth quarter of '07 when measured on a constant currency basis. This is by far the fastest growing segment of the company's business.

This rapid growth was driven by our ability to cross sell to new and existing clients, customer care, first quality collections and back office services such as lock box and loan profit centers. We currently provide customer care services for major financial institutions from both onshore facilities around the world as well as facilities at our offshore locations in the Philippines and Latin America.

We are providing first party collection services for U.S. financial institutions from sectors in the U.S. as well as in the Philippines, and we're providing BPO services for financial clients from our facilities in India and the Philippines.

While we were successful in growing our core financial services business in 2008, we were also successful in simultaneously building upon our Teleco technology market expertise by capturing programs from existing clients, successfully renewing contracts that reached term and most importantly, by adding six new clients in the U.S., Canada, the U.K. and Australia.

Core Teleco technology sector revenue totaled $31.6 million in the fourth quarter of '08, down 10% from last year's fourth quarter but up 3% when measured on a constant currency basis. We expect to see a greater impact from our recent successes in this sector in 2009 as new programs continue to ramp up for clients around the world both onshore and offshore.

This sector is expected to account for 40% of our core business revenue in 2009 and be comparable in size to the core revenues to be derived from the financial services sector if current trends continue through the year.

In terms of the Health Care market, core business revenues are down year over year but up sequentially as a result of growth in patient support programs for pharmaceutical clients that grew in the fourth quarter. We are seeing increased interest in this sector to support product lines on a global basis with large pharmaceutical companies throughout Europe and Asia.

Also, we just ramped up our first patient access program for a chain of hospitals in Southeastern U.S. We've begun marketing this service to other large hospital chains and market lease activity has been positive. We view this as a potential growth opportunity for ICT in 2009 and beyond.

Let's take a moment to discuss key business development trends. Decision cycles lengthened in the fourth quarter compared to the third, but we did see sales pick up early in 2009 as clients are aggressively seeking ways to lower their costs during the protracted economic downturn.

The annualized value of new core business wins in the November through January time frame was approximately $22 million. About 75% of these wins were from existing clients and 25% from new ones. Most of these programs will begin to ramp up in the second quarter of this year with about 45% of the revenue to be produced onshore and 55% produced offshore.

These wins will help support growth of our core business in 2009 and help offset potential declines in call volumes from existing programs.

We are seeing continued strong demand for our core services across all our targeted verticals, but it's difficult to pinpoint how decision cycles and production volumes will trend. The good news is that while price is always an issue in our business, we're not seeing an inordinate amount of pricing pressure in the markets.

Our international clients are responding well to our initiatives to move more of their production offshore and we are now supporting clients from Canada, the United Kingdom and Australia from our offshore centers.

We believe that 20% to 25% of the total production from clients in these developed international markets will be serviced from our lower cost offshore locations in 2009, up from 10% in 2008 which should lead to margin improvement.

At the same time we expect our percentage of offshore production for U.S. clients to increase only slightly from 65% in 2008 to approximately 67% in 2009 as U.S. companies focus on right-shoring their outsourced operations.

Our I-Home home based agent solution continues to successfully expand in Canada and we are focused on migrating the model to the U.S. and to the other developed markets in which we compete. We continue to grow out our Latin American operation in Mexico, Costa Rico and Argentina to support local and regional markets as well as provide additional offshore alternatives for U.S. and European clients.

At this point, I'm going to turn the call over to Vince to provide you with more details on our fourth quarter and full year 2008 financial performance as well as our guidance for the first quarter of 2009.

Vincent Paccapaniccia

For your reference, reconciliation tables for non-GAAP financial and quarterly call volume statistics may be found at the company's web site. In addition, my discussion of gross margin, EBITDA, operating profit, net income and diluted earnings per share is before charges which I will address separately.

As John noted, we made important progress in improving the company's profitability, strengthening our balance sheet and enhancing our liquidity during the fourth quarter of 2008. Total revenue for the fourth quarter of 2008 was $101.6 million and core revenue which excludes market research, U.S. and Canadian financial Telesales totaled $92 million remaining relatively flat compared to $91.3 million in the fourth quarter of '07.

On a constant currency basis, core revenue increased 8.5%. Non core revenue for the fourth quarter of '08 was $9.6 million declining 54.4% compared to $21.2 million in the prior year and declining 52.6% on a constant currency basis.

Adjusted gross margin was 40.5% in the fourth quarter of 2008, increasing approximately 470 basis points versus prior year. While foreign exchange rates benefited the margin, the higher percentage of offshore production, improved labor productivity in the United States and higher margins on ancillary revenue also contributed to this improvement.

Adjusted operating profit for the fourth quarter of 2008 increased 39% versus the fourth quarter of 2007 to $1 million despite a 10% decrease in total revenue. While the fourth quarter 2008 operating profit was relatively flat compared to the third quarter of this year, adjusted operating to the third quarter '08 adjusted operating income. The third quarter amount included an $820,000 benefit from the previously discussed government grant.

Excluding the grant in the third quarter, the fourth quarter operating margin represents the third consecutive quarter of 80 plus basis point improvement in operating margin.

During the fourth quarter of this year, Philippine peso weakened against the U.S. dollar by 5.6% sequentially and by 10.4% versus the fourth quarter of last year. The year over year positive impact of changes in the foreign exchange rates inclusive of our hedging program was approximately $500,000 which represents 50 basis points of operating margin and $0.025 of earnings per share.

In the fourth quarter of 2008 Philippine peso denominated costs comprised 23% of the company's consolidated cost structure.

Wage inflation in our three primary markets, the U.S., Canada and the Philippines was in the low single digit range for the fourth quarter of 2008 versus the prior year quarter and that is done on a constant currency basis.

Net interest expense of $109,000 in the fourth quarter of '08 increased substantially versus the fourth quarter of '07 net interest income of $157,000 due to the write off of a portion of the deferred financing charges for the reduction in the size of the credit facility. Since we reduced the credit facility of $125 million to $75 million we wrote off $108,000 or 40% of the unamortized deferred financing costs associated with $125 million credit facility.

Pre-tax income for the fourth quarter of 2008 was $888,000 increasing 2% versus the fourth quarter of '07 and for the fourth quarter of '08 we recognized a 10% income tax benefit resulting in adjusted net income of $981,000 or $0.06 per share.

The fourth quarter 2008 financial results reflect the impact of share based compensation of $526,000 compared with $506,000 in the fourth quarter of 2007.

The company continues to reduce its infrastructure costs. We have closed underperforming centers and reduced head count throughout the organization. The first major cut back took place in mid 2008 and we saw some benefits from these reductions in the fourth quarter.

Another round of cost reductions was implemented in January of this year and in February we made additional cuts to operating expenses by eliminating salary increases for management for the balance of 2009 and we reduced certain benefit plans as well.

At this point we have generated approximately $15 million in annualized cost savings company wide and we expect to see most of a full quarterly benefit from those savings in the second quarter of 2009. We plan to continue these efforts to reduce our cost structure to offset the lost gross profit associated with the decline of the non core revenue.

And now, I will discuss charges. On January 6, 2009 the company issued a press release that discussed staff cut backs and reductions in capacity in the U.S., European and Australian facilities. The restructuring charges relating to these actions were $6.4 million comprised of $4.5 million of lease and other contractual obligations, $1.5 million was severance charges and $350,000 of asset impairments.

Approximately $6 million of these restructuring charges will result in cash expenditures. The closure of these centers resulted in removing 905 work stations from production during the fourth quarter of 2008.

The non cash impairment charges in the fourth quarter of 2008 were $14.5 million. These impairment charges were comprised of $12.2 million of good will and $2.3 million of tangible fixed assets primarily related to Europe and Australia.

The company also incurred a $1.6 million charge related to an employment grant that the company had been recognizing since 2007. Recent personnel changes within the grants agency have hampered the grants' process. We continue to work vigorously to receive this grant, but the company decided it should write off this balance in the fourth quarter of 2008 due to the change in the grant agency environment.

The January 6 release also discussed the amendment to the credit facility. The company amended its credit facility to allow for the charges noted above and also reduce the facility from $125 million to $75 million during that amendment process to reduce unused fees. The company believes that $75 million is sufficient to fund the company through the remainder of the facility term which expires in June of 2010.

The company did not have any outstanding borrowings under the facility at December 31, 2008 and it also complied with a financial covenant included within the facility.

At December 31, we have 12,509 work stations in operation which is a net reduction of 831 work stations versus September 30, 2008.

At December 31, cash and cash equivalents totaled $31.3 million which represented a sequential increase of $4.6 million and the company has repaid all outstanding debt in the fourth quarter. We believe that we have more than enough cash and borrowing capacity to fund our growth for the foreseeable future.

Day's sales outstanding decreased from 62 days as of September 30 to 60 days as of December 31. Approximately 73% of our December 31 cash balances were maintained in international locations and would incur additional taxes is repatriated to the United States.

In the fourth quarter of 2008 total property and equipment purchases totaled $4.8 million or 4.7% of revenue. These expenditures were largely attributed to facility and technology infrastructure to support the Philippines expansion.

Capacity utilization for the United States and Canada increased from 66% in the third quarter of '08 to 71% in the fourth quarter of '08. Capacity in the Philippines remains over 90%. Total company fourth quarter capacity utilization grew three points sequentially from 76% to 79% and two points from 77% to 79% versus last year. We generated $11.1 million of cash flow from operations in Q4 of '08 and free cash flow totaled $6.3 million.

Now I'll address guidance. Within this very tough business climate, we are redoubling our commitment to cost reductions and capital preservation. For 2009 we expect to keep capital expenditures to approximately 4.5% of revenue.

Core revenue for the first quarter of '09 is projected to remain relatively flat compared to the first quarter of '08 largely due to the changes in the foreign exchange rates. Projected foreign exchange rates are expected to result in approximately $6 million loss core revenue in the first quarter of 2009 when compared to the first quarter of '08.

On a constant currency basis, first quarter '09 core revenue is projected to increase by 6% to 8% year over year. Non core revenue in the first quarter of '09 is expected to decline by approximately 70% versus last year resulting in first quarter 2009 total revenue in the range between $92 million and $96 million.

Some residual costs associated with cost reductions will be incurred in the first quarter of '09 in addition to the seasonal first quarter costs associated with payroll taxes, audit fees and tax preparation costs that we typically experience in each first quarter. Including these factors, projected first quarter 2009 diluted earnings per share is projected to be a loss of $0.04 to $0.08 per share.

Projected foreign exchange rates are expected to result in approximately $20 million less revenue in full year 2009 as compared to 2008. On a constant currency basis, full year 2009 core revenue is projected to increase by 8% to 10% year over year. Full year 2009 non core revenue is projected to decline by $30 million to $35 million, again as compared to full year 2008.

We project combined U.S. and Canadian capacity utilization to increase to the mid 70% during 2009 and to maintain the high levels of capacity utilization in the Philippines as we expand in the provinces.

We continue to hedge six forward quarters for the Philippine peso and we currently are 75% hedged for calendar 2009 at approximately 45 exchange rate and we are 25% hedged for calendar 2010 at an exchange rate that approximates 49.

The effective income tax rate for 2009 is expected to be approximately 20%. We continue to anticipate quarterly income tax rates will continue to fluctuate based on the geographic distribution of the company's profits in each respective quarter.

At this point, I would like to return the call to John.

John Brennan

Just a brief summary of our outlook for 2009. Despite the economic uncertainties ahead, we believe that ICT Group is now well positioned to continue growing its core business in its targeted vertical markets as clients and prospects seek to reduce infrastructure costs.

We believe the combination of vertical market expertise and client relationships, aggressive services and global footprint will enable us to continue winning business from new and existing clients.

Our internal projections call for our core business to post year over year growth throughout 2009 measured in both production volume and revenue on a constant currency basis. As a result of the actions we took over the past six months in terms of cost cutting, down sizing and redirecting our resources to support our core business, we expect to achieve greater operating leverage and improved profitability in 2009 through increased productivity, greater work station utilization and the projected decline in SG&A costs as a percentage of revenue.

We will continue to focus on cost containment through the uncertain economic environment and plan to reduce capital expenditures again in 2009 so as to maximize cash flow and maintain good liquidity.

In summary, we are cautiously optimistic for ICT Group's prospects for 2009 based on the strategic initiatives we have put in place to grow our core business while simultaneously reducing our cost structure.

At this point in time, I'd like to open the call for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Howard Smith – First Analysis.

Howard Smith – First Analysis

On the grant charge, was that all in SG&A?

Vincent Paccapaniccia

No, it would be in cost of services.

Howard Smith – First Analysis

As you look forward to 2009, you talked about some of the ongoing costs and the first quarter costs on the SG&A side, would you expect to be able to keep your gross margin in that 40% plus range going forward?

Vincent Paccapaniccia

Yes. We believe the margins will remain in the 40% plus range quarterly throughout 2009.

Howard Smith – First Analysis

On the non core revenue, as we look long term, is that something that eventually will dwindle down and you'll exit that or is that tail quite long and will extend into 2010 and perhaps beyond?

John Brennan

We certainly are out of the market research data collection business. We still have about a half dozen North American financial clients that we are doing a much reduced level of Telesales activity with that is typically part of a larger relationship we have with them. I think it will tail on but would not expect it to be any kind of meaningful increase. We're talking about something that will be in the range of $5 million to $6 million a quarter in 2009.

Howard Smith – First Analysis

It looks to me like the DSO declined and the decline in receivables combined with some of the severance cash costs etc. would cause you to burn cash, particularly in the first quarter but maybe in the first half of '09. Is that consistent with your expectations to perhaps be free cash flow negative in the first half?

Vincent Paccapaniccia

Yes. As I look at it, I think it will be pretty close, but I think it will be slightly negative and I think you're timing is right on, so I think its Q1 and Q2.

Operator

Your next question comes from Josh Vogel – Sidoti & Company.

Josh Vogel – Sidoti & Company

Just building off that last question, can you give us any sense of where you see free cash flow coming in for full year of '09?

Vincent Paccapaniccia

As you know, we don't have any guidance out there, but I'll just try to do some comps to give you the direction as we are looking at it right now. I do think the first half will be pretty flat, probably slightly negative as I discussed with Howard.

And then just looking at the last two fourth quarters, fourth quarter '07 and fourth quarter '08, we generated over $6 million in each of those quarters so full year we certainly project to be positive and I think it will be somewhere in the range north of full year 2008 but just as I mentioned, from the first half perspective it will be largely back end loaded, but not that dissimilar to the 2008 run rate.

Josh Vogel – Sidoti & Company

Looking at the $15 million in expected annual cost savings, I guess from a modeling perspective should these savings be weighted more in line with your historical EPS trends? Instead of maybe modeling a little under $4 million a quarter, should we expect to see more leverage in Q3 and Q4?

Vincent Paccapaniccia

Yes. We think we'll be benefiting pretty much a full quarter; the first full quarter will be the third quarter. It will be more than 90% of that benefit in the second quarter of '09. In Q1 we did have some of the actions actually happened part way through the first quarter of '09 so we would not get a full benefit in Q1.

So yes, I think you would float those in starting at just under $4 million a quarter for three and four, most of that for the second quarter. But the think I will point out is, as I shared in my comments, for Q1 as usual, will be the seasonal first quarter costs that we experience annually.

John Brennan

Also, we do expect presently to see continued revenue growth through the year and we would be adding some capacity in the Philippines and other offshore locations in the second half of the year, at least potentially if the revenues materialize. So where the cost cuts occurred and we shut down facilities in North America and reduce that, there could be some back shoring of that with facilities and technology and people.

Josh Vogel – Sidoti & Company

Of the seats you're planning to rationalize in Europe and Australia, how many seats is that and are you fully exiting these markets?

John Brennan

We have about 200 seats in Europe and about 200 seats in Australia and we are keeping a small footprint there and primarily selling an offshore solution from those locations. So we have reduced our footprint in those two regions of the world. We're keeping a sales presence and a base of operations to facilitate sales.

Josh Vogel – Sidoti & Company

Of the 12,500 seats, I was just curious how many are offshore and what percent of your revenue is coming from offshore versus a year ago?

John Brennan

The percent of the offshore work for the U.S. was about 65% of our production volume which represented about 45% of our U.S. revenue. If you take the rest of the world, I shouldn't say that, but for Canada, Australia and the U.K. revenue was about 10% of their production volume was done offshore last year and probably represented about 5% of their revenue. So those three countries together represented about $100 million.

Vincent Paccapaniccia

I just look at total Philippines and total Latin America, it's just over half. It's almost 55% total seat count are in those two lower cost geographies.

Operator

Your next question comes from Shlomo Rosenbaum – Stifel Nicolaus.

Shlomo Rosenbaum – Stifel Nicolaus

Could you give me a better understanding of what the government grants are? I didn't understand that.

Vincent Paccapaniccia

We have been working with government to go into a certain geography. We have moved into this geography and have been working with them and we have recognized this grant. We've gone through the entire process. We've reviewed it with our auditors. At this point in time we've had a change in circumstance during the fourth quarter of 2008 that now frozen the question the amount that we will ultimately be able recognize from this process.

We believe we are working diligently. We've engaged a number of consultants to assist us in this and we believe we're going to be successful in ultimately being able to enjoy this benefit, but at this point in time we're still reassessing the change in the situation.

Shlomo Rosenbaum – Stifel Nicolaus

This was meant to offset some of the costs?

Vincent Paccapaniccia

Yes. Precisely.

John Brennan

Something like that, they all vary by location and so when a work opportunity tax credit. You could look at it something like that where we were informed that we were eligible for and then they had a change of management and we're now having to reapply.

Shlomo Rosenbaum – Stifel Nicolaus

Is that going back a few quarters? In other words are you reversing something from a few quarters back or is this just something from the fourth quarter that you're taking care of in the fourth quarter?

Vincent Paccapaniccia

The $1.6 million is everything that has been recorded up through September 30. We did not recognize any of this grant in Q4 of '08 and on the P&L table attached to the earnings release; we do show the charges for 2008 and 2007 as they were recorded.

Shlomo Rosenbaum – Stifel Nicolaus

Is the core business comparable now on a fully allocated basis, if I just took the core business?

John Brennan

I think we still have some overhang of SG&A for the non core business which will wind down over the course of this year. We believe that's going to be down as we mentioned to $5 million to $6 million a quarter of that revenue, so about 95% of the core business. I think the core business is definitely profitable.

Vincent Paccapaniccia

Let me throw in some geographic response to that because I think our core is in several areas. If you look in the U.S. I'd say yes the core business is profitable. The core does include the international operations and there you would say looking at Latin America which is Mexico and Argentina, they are profitable on a contribution basis. Europe and Australia still remain unprofitable at this point.

Shlomo Rosenbaum – Stifel Nicolaus

What I'm trying to get at is that are you going to be whittling down the SG&A as the year goes on and therefore the core business does become profitable as a whole?

John Brennan

We expect to be profitable through the balance of the year except for the first quarter. So it's a combination of the core business growing and the SG&A being constrained or declining.

Shlomo Rosenbaum – Stifel Nicolaus

It look like you paid off all the debt in the quarter and there's only like $6 million in free cash flow which is good free cash flow, but the cash remains relatively the same after paying it down with free cash flow. I'm sorry. The cash balance remains the same after paying most of the free cash flow for debt. I was just wondering if there was something else below the free cash flow line that produced any cash.

Vincent Paccapaniccia

The way we look at it, we are looking at we walk through the change in the net cash position, and we said that grew by about a little over $4.5 million sequentially from about $26.7 million to over $31 million. You question is do we generate anything below free cash line. There's really not a whole lot below free cash.

Operator

Your next question comes from Bob Evans – Craig-Hallum.

Bob Evans – Craig-Hallum

In terms of seat count, how should we view seats for '09 in terms of additions or deletions?

John Brennan

For '09 we're looking at about 4.5% of revenue for CapEx which gives you a number in the upper teens. As you know about half of that will be spent in maintenance. About half of that will be spent on expansion, which give you in the area of about 1,000 seats.

Bob Evans – Craig-Hallum

How about the net net? 1,000 seats added, do you know who many you're pulling back?

John Brennan

Probably very few. We think we've downsized facilities in the locations where we have less demand, particularly in North America. So I think we're going to have a net add of somewhere in the 500 to 1,000.

Bob Evans – Craig-Hallum

Can you give us a sense of what was new business or added business in Q4 and what you're seeing in current pipeline environment, a little more detail there?

John Brennan

We're seeing opportunities across the board. I think we see most of the opportunities, I think the $22 million of new wins which were a bunch of small things where they average about $4 million to $6 million and meaningful new wins of about $3 million to $10 million I believe in annualized revenue that we announced.

We saw November and December being very slow. We've seen a significant pick up in activity in the beginning of the first of the year. We had three significantly different opportunities in the Philippines this past week, some with new clients, some with existing clients. A lot of activity we're looking at off shore.

We're seeing activity both in the financial services sectors. We're seeing activity, we talked about launching this hospital initiative. We're seeing a lot of interest in the health care area, more than we've seen in the past year. That one is early on. I'm not so sure how well that's going to grow still.

We're beginning to see a good number of government bids coming out. We've set up an office in Washington D.C. area and hired a dedicated sales person down that. We've added three net new sales people, probably added about eight people in the past year, moved some in and some out, but we had net add in the past six months of three sales people. We're recruiting five more right now.

So we're seeing opportunities in the BPO space, and we're seeing significant opportunities in the customer service and I'd say where they typically are, is the financial services companies and the telecommunications carriers are the biggest markets in all segments of the world that we compete in.

Bob Evans – Craig-Hallum

Of the $22 million you referenced, how much of that is new versus existing?

John Brennan

Seventy-five percent of it came from existing and 25% came from one or two new clients.

Bob Evans – Craig-Hallum

On the seat count, I believe you said 55% is Philippines or Latin America. How do the other regions break out?

John Brennan

North America is about 5,500 at the end of the year so it's about 40%, something like that, so 5,500 in the U.S. and Canada, 200 in Europe and 200 in Australia. There's about 5,000 in the Philippines and India and just under 2,000 in Latin America.

Bob Evans – Craig-Hallum

I assume that most of the seats that you're going to add will be predominantly Philippines and Latin America?

John Brennan

Yes.

Bob Evans – Craig-Hallum

The non core, I believe you said for '09 would be down around $30 million to $35 million, is that correct?

Vincent Paccapaniccia

That is correct.

John Brennan

It will down to about $20 million to $25 million. So it becomes pretty negligible.

Bob Evans – Craig-Hallum

The revenues that are bucketed, or what's in that non core bucket?

John Brennan

This year it will be just financial sales. It's the traditional credit card telemarketing work for North American banks, insurance companies and so forth.

Operator

Your next question comes from Shlomo Rosenbaum – Stifel Nicolaus.

Shlomo Rosenbaum – Stifel Nicolaus

The ARP SO improvement was very good in the quarter, I think it was the lowest GSO in my model in the last five years. Is there something big that came through or was it just the general blocking and tackling that you are focused on right now?

Vincent Paccapaniccia

We worked really hard and closely with our clients to try to get the cash in. We've been focusing on two big areas. We've been looking at for the whole second half of '08 has been cost reduction and also cash preservation, capital preservation. We had worked with a couple of clients. A couple of clients we are billing more than once a month. We're trying to get twice a month billing with some of our clients.

So we are trying to implement new ways. Instead of waiting till billing at the end of the month which is the normal process, we're instituting where we can the ability to bill twice a month, things along those lines.

Shlomo Rosenbaum – Stifel Nicolaus

Just understanding the $15 million in cost savings, is that off of the total base in 2008 from your basis spends? You have been able reduce that total number by $15 million?

Vincent Paccapaniccia

The way we looked at it is, we looked at our base line, I would say our run rate at September 30, our Q3 '08 run rate and we just started identifying, accumulating I'd say all of the cost reductions we've put in place. These amounts we took out of facility. These amounts we took out of staff costs, etc. and we've just been accumulating them and we're just over $15 million now with third quarter '08 as a base line.

Operator

Your next question comes from Bob Evans – Craig-Hallum.

Bob Evans – Craig-Hallum

In your guidance I believe you say you're in a position to achieve significant operating leverage in 2009. Can you give us any greater granularity there in terms of just trying to get some thoughts in terms of what you're thinking?

Vincent Paccapaniccia

As you know from the way we've had this call today, we don't have any 2009 guidance out there, but directionally I would say we are projecting that each of the quarters two, three and four will continue to grow sequentially like they did in the growth we experienced during those same quarters in 2008.

I think the first quarter will be in the range, just do the math. We have to calculate back because we did put out this EPS loss for Q1 of $0.04 to $0.08. At this point, I really would not get into operating margin or EPS guidance beyond Q1.

Bob Evans – Craig-Hallum

How when you look, and obviously it's an uncertain environment, but when you look at the things you're trying to accomplish to get to a more normalized operating margin, how far out do you think you are given some of the cost reduction efforts, some of the things you're trying to do to grow revenue. You've taken a lot of business offshore so you've incurred some of those costs. I'm just trying to get a sense of you certainly had higher operating margins in the past. When can you perhaps return to get closer to returning to that?

Vincent Paccapaniccia

It's a great question and we have some internal thoughts on when we will get back there. The big unknown that remains in our mind is if you just think about the numbers we're talking about, $30 million to $35 million decline in non core which is the $60 million number. The numbers are huge. If it goes down $40 million or $50 million, only $20 million could have a significant impact on our profitability as we look forward into 2009.

That's why we want to take it on a quarter to quarter basis and continue to focus on reducing costs to try to offset the margin we lose on these declines. That's really our big focus right now. We need to make sure we get the core profitable and to make sure that we can offset the margin declines we're experiencing on the non core business.

John Brennan

I would add I don't think it's going to happen that we're going to get there by the fourth quarter of this year and you could probably say it will be a two year process. The uncertainty, we've reset the company. We've migrated out of what I call the more volatile, the market research and the Tele research business that were meaningful components of our business in North America that we just decided that we would exit them.

We've been able to replace the capacity or shut it down or replace it with back office or customer care, so we kept some of those facilities particularly in the Philippines in operation that we're doing the Tele sales business that was going downhill quick.

So we rebalanced the company. We've been very successful. I think the amount of growth that we've been able to achieve in the customer care and the DPO work particularly in financial services sectors was hidden by the decline that was going on in the Tele sales work.

My goal is to get us there, but I think it's back to reasonable operating margins, but I think it's going to be a 2010 probably, the second half of 2010 before we can expect to get back to mid to upper single digit operating margins.

So we think we'll make improvement this year. The uncertainty is the economy. All the great plans that we put in place, and something just tanks in the economy or the clients or whatever that we just feel uncomfortable given too specific guidance at this point, so we'll do it a quarter at a time. I think it's a two year journey right now.

Operator

Your next question comes from William Sutherland – Boenning & Scattergood.

William Sutherland – Boenning & Scattergood

Did you say the new sales number for Q4?

Vincent Paccapaniccia

It's about $22 million.

William Sutherland – Boenning & Scattergood

Was there any government business in that?

John Brenna

There was no government business in that. I did mention that we just opened up a sales office in the Beltway and have a dedicated sales guy down there now. There's a lot of bid activity. We are part of an approved list of nine suppliers to the GSA. The big guys in there like computer sciences, Lockheed Martin and some niche players, so there's been some early contracts coming out of that, but it's early bids.

But the big ones, the quantity we're probably aware of about 10 different bids that we're involved in so there's a lot of activity picking up. We're trying to judge whether we add another resource.

William Sutherland – Boenning & Scattergood

What agencies in particular are you seeing request from?

John Brennan

We get a list. Typically they are tertiary; it could be Veteran's Affairs. I know the State Department is one of them. There are some in the Social Services arena. Sometimes they are, the call center component in some of these is a small component of a very large contract and some of it is just a call center.

William Sutherland – Boenning & Scattergood

Is this more of an ongoing government initiative or is it somehow tied a bit to all the stimulus?

John Brennan

What happened was, the GSA is a contracting vehicle for secondary agencies and the large agencies like Social Security and the IRS and they will go out and manage their bids themselves. The GSA on a five year program, we won about half the bids during that time frame. Over the past five years, they had $150 million budget to outsource.

This year, it's a ten year plan with nine suppliers that's worth $2.5 billion of sort of approved spending they can do through that vehicle and now they go out and market. They can be the contracting vehicle for these smaller agencies.

So that's our primary effort. It goes through the GSA where we have the relationships, but now we're opening up and also getting involved directly through partnerships with some of these larger independent agency bids.

I think everybody in Washington, I think Washington D.C. is the only city where house prices are going up and unemployment is going down so everybody is going through the trial here and certainly we plan to do the same through our, I think we're in 11 different states and we will be getting a program in place to talk to all of our local representatives.

William Sutherland – Boenning & Scattergood

That $2.5 billion is to be contracted over 10 years?

John Brennan

They have the ability to approve to outsource or to manage up to $2.5 billion over 10 years.

William Sutherland – Boenning & Scattergood

Any client concentration stats?

Vincent Paccapaniccia

We have one 10% client for a full year 2008.

William Sutherland – Boenning & Scattergood

And then it drops off well below 10%?

Vincent Paccapaniccia

I'll give you the top five are 33% and top ten are 47%.

William Sutherland – Boenning & Scattergood

How much of the impact in Q1 as far as the extra expenses, or expenses beyond the ongoing run rate, how much of that is in Q1?

Vincent Paccapaniccia

Are you talking about the seasonal or are you talking about the expense we incurred associated with cost reduction activity?

William Sutherland – Boenning & Scattergood

The later.

Vincent Paccapaniccia

It looks to me like it's in the area of, I don't have this quantified down, it's probably in the area of $0.5 million to $1 million.

Operator

There are no further questions. I'd like to turn the floor back over the Mr. Brennan for closing comments.

John Brennan

Thank you very much everyone for your participation and your questions this morning, and we look forward to reviewing our first quarter results in April and in providing you at that time with our updated outlook for the balance of 2009.

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