Pactera Technology International's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Pactera Technology (PACT)

Pactera Technology International Ltd. (NASDAQ:PACT)

Q4 2012 Earnings Call

February 27, 2013 7:00 AM ET

Executives

Sheryl Zhang – Associate VP, IR

Tiak Koon Loh – CEO

Sidney Huang – CFO

Analysts

Moshe Katri – Cowen & Company

Amit Singh – Jefferies & Company

James Friedman – SFG

Dick Wei – JPMorgan

Joe Foresi – Janney Montgomery Scott

David Grossman – Stifel

Steve Zhang – Macquarie

Operator

Hello, and thank you for standing by for Pactera’s fourth quarter and full year 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host for today’s conference Ms. Sheryl Zhang, Associate Vice President of Investor Relations of the Company. Ms. Zhang, the floor is yours.

Sheryl Zhang

Thank you, operator. Hello, everyone, and welcome to Pactera’s fourth quarter and full year earnings call. I’m joined today by Tiak Koon Loh, our Chief Executive Office, and Sidney Huang, our Chief Financial Officer.

Before we discuss our results, I would like to remind everyone that the discussion today will concern forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 and within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from our current expectations.

Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. Pactera doesn’t undertake any obligation to update any forward-looking statements except as required under applicable law.

In today’s call, we will discuss various non-GAAP financial matters as defined by the SEC’s Regulation G. Other consolidation of the differences between GAAP and the non-GAAP financial matters can be found in our earnings release posted in the Investor Relations section of our website.

I will now turn the call over to our CEO, Tiak. Tiak?

Tiak Koon Loh

Thank you, Sheryl. Hello, everyone, and thank you for joining us today. On a pro forma basis in the fourth quarter of 2012, we secured 17.9% year-over-year growth in spite of the adverse effect of the Japan currency depreciation and the strong headwind from our European business in our largest telecom brand.

We were very encouraged with the continued growth in our domestic business and the Asia South business, with strong year-over-year growth of 34% and 67.4%, respectively. Excluding the impact from our largest telecom brand, our domestic business grew 71.9%, which clearly showed our strategy to focus on more value-added services and industry solution in dealing great pressure in China.

By industry verticals, financial services continue to be on fire, tracking [ph] with our year-over-year growth of 47.2% and now representing 26.4% of our services portfolio. This is largely driven by the strong demand for our solution and services in the domestic banking sector. We grew at a phenomenal rate of 172.9% year-over-year.

The technology sector is beginning to see a growth of 16% as we deepened our penetration in a number of significant points. In the telecom sector, we saw revenue declined of 4.2% as we started budget cuts and contract delay with our top two clients in this sector.

As I look back to 2012 and how our results, our market leading year-over-year growth, revenue growth of 34.1% with decent operating cash flow. Our operating cash flow in the full year 2012 was $36.3 million, representing a growth of 49% compared to 2011. The fundamentals of our business are strong, which is illustrated by the growth in our number of significant clients from 65 to 85 in 2012. Among these 85 significant clients, 36 are Fortune 500 companies.

Next I’d like to discuss the progress of our integration, which obviously was a giant project to bring more than 23,000 staff under one operating and management infrastructure. We set ourselves a very aggressive of completing these by the second quarter of 2012 and I’m pleased to report that we are on track in almost every aspect.

We have completed the HR levering [ph] of our staff and then designed a new go-to market organization by both industries and geographies to better serve the needs of our clients. So far, we’ve not seen out of the normal turnover at director and above level and we experienced a voluntary attrition of only 4.5% in the last six months.

These achievements are lower than our pre-annual year one pre-attrition rate of 11.1% for the same level of staff in the first half of 2012. While the integration effort is progressing well, we do acknowledge this is far from complete.

Now, I’ll turn the call over to our CFO, Sidney Huang to walk you through our financials.

Sidney Huang

Thank you, Tiak. Hello, everyone. Let me spend the next 10 minutes to go through the fourth quarter financial results and 2013 financial outlook.

As Tiak has mentioned, our fourth quarter topline growth continued to be solid, led by our domestic financial services vertical. On the margins, however, the fourth quarter performance was shadowed by expectations. Consolidated Q4 gross margin was 33.5% and non-GAAP operating margin was 10.8%. These margins benefit from the fact that the consolidated financial results included only 52 days from VanceInfo since the merger closing, which is a seasonally strong period as compared to the proceeding 40-day period when there was a long national day in early October.

So let me talk about the pro formas. On the pro forma basis, the fourth quarter gross margin was only 30.2% and the non-GAAP operating margin was in high single digit. This is largely due to the softness from our largest telecom customer and our US consulting business as to all our certain one-time target issues in our Asia South and Hong Kong business units.

In addition, as in any large merger transactions, we have seen some short-term loss of productivity in the fourth quarter, especially for business units that are being restructured in a combined organization. The restructure process and the result in the loss of productivity will extend into the first quarter and then to a less extent the second quarter.

Currently, we estimate a negative impact of 2% to 3% on our revenues from such loss of productivity, which will have an estimated 100 to 200 basis point effect on our short-term margins. We will refer to this again in our guidance discussion.

Our fourth quarter non-GAAP EPS was $0.24, which is in line with our guidance. On a pro forma basis, non-GAAP EPS was $0.19 in the fourth quarter and $0.79 for full year 2012. On the bright side, our operating cash flow was very strong at $33 million in the fourth quarter, reflecting the strongest seasonality in cash collection cycle for our domestic business. Our cash position stood at $210 million, the highest among all of the China-based IP services players, and we expect to continue generating positive operating cash flow in 2013 on the full-year basis.

Now, let me explain a little more on our largest customers. As we disclosed in client footers [ph] and also in this current earnings release, this customer had formed two joint ventures with our competitors. As we understand, as part of the JV agreement, the customer committed to the JV partners certain business volume in the next several years. As a result, we began to see a large number of new projects being redirected to the JVs in the second half of the fourth quarter, which resulted in low utilization of our staff since mid-November.

By early 2013, especially in recent weeks, the customer made clear to us its intention to shift a certain percentage of our business to the joint venture partners in the first half of 2013 and they’re seeking our support for an orderly transition.

We’ve responded that we will fully cooperate with our customer in this process. While it is still in the early stage of the discussion with various parties, we expect the revenues from this customer will decline by at least 40% in 2013. Meanwhile the business side of this customer remains positive about our services and has urged us to maintain our relationship to the extent possible.

Now let me turn to the 2013 financial outlook. Given the special customer situation and the limited availability of its future revenues, we are separating our guidance into two pieces. For our revenue excluding the largest telecom customer, we are projecting at least 17% growth in 2013, which is roughly the blended industry average estimated by IDC.

This estimated growth rate takes into effect the short-term evident loss in the early part of the year due to the merger as well as 20% plus growth outlook for the second half of 2013 when we are resuming the normal growth trajectory and beginning to see revenue synergies bound to combine operations.

The current guidance has also taken into account the 15% Japanese yen depreciation in the past three months. Given the Japanese business contributed over 10% of our revenues, the currency move will have at least 1.5% negative impact on our total revenue growth.

On GAAP EPS guidance, we are providing a preliminary range of 0.75 to 0.80 for 2013 compared to a pro forma of 0.79 in 2012. The main reason for a relatively low EPS outlook is the last profit, some are largest telecom customers which contributed roughly 0.17 to the 2012 pro forma EPS at the business unit level before any corporate overhead allocation.

The corporate overhead is relatively fixed. The deterioration in product profitability on this unit will roughly flow to the bottom line. In 2013, as the business transfer process may result in low utilization of the staff, we expect a limited EPS contribution from this client, excluding the set of this customer. The current EPS guidance would have suggested an EPS growth of over 20%.

So what will that imply on our non-GAAP operating margins? As you can see from our Q1 EPS guidance, we are projecting a conservative margin in the first quarter partly due to the telecom customer transition and the merger related short-term effect and partly due to the higher seasonality as our China business contribution has increased to over 40% in the latest quarter, up from 35% a year ago.

Another negative impact that will likely stay with us this year is the yen depreciation which at 15% would reduce our margin by approximately 120 basis points. Having said that, we are confident that we will move our margin backup throughout the year and it will exit the year at no less than 12% in non-GAAP operating margin in Q4.

Our GNA comp synergies are being realized and we have good visibility in achieving the 75 basis point savings by the second quarter and the 200 basis points by the fifth quarter post the merger. With that, I will turn the call back to Tiak for closing remarks.

Tiak Koon Loh

Thank you, Sidney.

In summary, I remain confident that in this increasingly dynamic IT services environment, we are executing the right strategy to deliver both the skills and the capability to meet the needs of our client.

Despite the current headwinds, the fundamentals of a – we see opportunities to upsell and deliver an extended set of services with the combined company.

Annually [ph] it’s progressing well on the sales front itself and we’re releasing numerous wins resulting from synergy of both teams. We are on target to complete our operating and management infrastructure integration by June 2013, which will further enhance our ability to compete in the market. We expect the adjusted EBIT margin to expand quarter to quarter to no less than 12% by Q4 of 2013.

In closing, I want our shareholders to know that our focus is on providing long-term shareholder value. We are very grateful for your support as always. Now, I’ll open the call to question.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Thank you. And our first question Moshe Katri from Cowen. Please go ahead.

Moshe Katri – Cowen & Company

Okay. Thanks. So Sidney, I just want to follow up on your comments regarding margins and to add comments regarding where you will be exiting in Q4. You said roughly about 12%. Can you kind of walk us through some details what gives you the confidence that we’re going to see that margins actually expand? And we have that problem obviously two years ago as well.

So maybe some more details on that in terms of just to give us some of the confidence that margins will get to that 12% number by Q4.

Sidney Huang

Right. So in short term, as I mentioned, a couple of short-term effect, like, some is related to MOE integration. As everyone would expect, and we had expected that when the large merge like this happens, when we structure certain teams, there will be some loss of productivity in the short term.

So, that’s why part of the reason for the first half, lower margin would be due to the MOE-related integration issues. And we see that and we do see those issues as short-term in nature. Okay. And then the second is on our large telecom customer because we are in a transition period.

At least the customers are requesting that we would send a meaningful amount which will be somewhere around 40%, 50% of our business to the trading partners. So in the process as transition those business out, there could be no utilization as we mention, right? So, that will also have short-term impact on the margins.

In fact, in Q4 we already saw the last margin effect from this activity because the customers interrupted a new project without much client warnings to other partners. And so, we kind of left it with a fairly low utilization before the customer formerly approach us to say, "Hey, we actually want to shift with some good business in earlier this year."

So those are two really short-term impacts that we can see. And then into the second half, we do expect more revenue synergies which will help us on the topline. We are seeing a lot of activities in the pipeline that Tiak can talk to you about. But this will help us lift first on the topline growth trajectory and also, G&A cost savings.

We are already cutting down a meaningful number of back office redundancies. But at the same time, I have areas like facility consolidation will take some time to actually get the effect.

So these are also well underway. It’s just that the effect will be coming out piece by piece in the first half. And by second half, those will actually go through into the margins. So, those will be few high-level items that I can point out.

Moshe Katri – Cowen & Company

Okay. And what’s embedded in your guidance for revenue growth for the year from Japan and also from your other telecom client that’s based out of Europe?

Sidney Huang

Japan’s problem is that – and the other European –

Tiak Koon Loh

I would believe that we have a very difficult year with Europe and we believe that we still continue to have a very difficult year of Europe. European business is concentrated around two client; one is in the banking industry and the other one is the telecom player. They both obviously are having tremendous challenge in the business.

The Japanese business, the yen depreciation is a huge impact for both the revenue line and particularly at the margin line. There’s 12%, 15% that we’re seeing really something that’s tremendously. But on top of that, I think the situation, the tension, the political tension right now between China and Japan is not improving. As a matter of fact, with the new government, it seems to be getting to a new level.

So to a certain extent, I think a slowdown in business activity. So I would say that today Japan will probably be – very much effect this year. Our U.S. business will still grow at a modest level, but it’s not going to be huge double digit. What I think still continue to be a very bright part with China, but you have to take that between WowWay [ph], the largest telephone client and [inaudible].

Outside that, we are seeing very strong double-digit growth. But once we take that into consideration, we have about a huge revenue depression that we’re seeing with debt not just Telecom clients. It’s [inaudible] but we do see at the end a very strong double digit growth in China.

We should see also a good growth in Asia. So we do have a mix bag. So we are in a situation in 2013 where we do not have almost every geographical cylinders barring in a synchronized manner. We have almost two very distant geographies, Europe and Japan. And we are, obviously, doing well in other job presentation. And so in the end, we get a bonded effect.

Moshe Katri – Cowen & Company

Okay. And then final question, Sidney, you mentioned that you’re expecting free operating cash flows to be positive in the year. Can you comment on free cash flow expectations for the year and can you kind of give us a range for that number?

Sidney Huang

That would depend because we are – the payment for our Beijing headquarters are already completed. But we are paying some money out for our Oshu facilities. So there will be some cash outflow and then the rest will be just some M&A activities which I can’t really predict.

But overall, if you look at 2012, we have only 6 million positive operating cash flow and the businesses are healthy. If you look at [inaudible] on a combined basis 119 days if you exclude the largest customer, we are actually well below 100 days. So as large customer business filing comes down, the cash flow situation actually improved.

So that’s why we feel pretty good about cash flow situation. But I can’t give you a free cash flow number right now.

Moshe Katri – Cowen & Company

All right. And then one last question, I’m sorry. Could you just remind us how many people are working on the WowWay account today and how quickly could he actually redeploy these guys without severely impacting your bench or your utilization rate?

Sidney Huang

W have a few solid people, but normally we don’t discuss single customer employees. But we have been trying to redeploy some employees, but others as we mention earlier that we are seeking a potential order transfer of certain project teams to the JV partners. So in that scenario then, the selected part of the team will be just transferred over.

Moshe Katri – Cowen & Company

Thank you.

Operator

All right. Thank you. And our next question comes from the line Jason Kupferberg from Jefferies. Please go ahead.

Amit Singh – Jefferies & Company

Hi, this is Amit Singh for Jason Kupferberg. I just want to dig a little bit deeper into your U.S. consulting business. You mentioned you saw some sort of weakness there. If you could talk a little bit more about what are you experiencing over their clients pulling back on some of the spending or just some company specific issues?

Sidney Huang

Yes. Jason , there was more comprehensive specific detail our U.S. consulting buskins. And so, very much almost 50% was tended around a couple of very significant banking client. And obviously, starting from Q3 and it was clear in Q4 that there was key, which talks back on the budget.

So a number of projects did not come through, and obviously, that being the case, you’d have utilizations and US resources tend to be more expensive. So we took that and actually impacted our margins for the US business in Q4. What we saw in Q1 is a slightly improved situation. Obviously, we are really taking certain actions to address utilization issues. So I believe that going forward into Q1, Q2, that is not going to be a big issue anymore.

Amit Singh – Jefferies & Company

Okay, perfect. And just quickly, after this merger announcement and then the JV, how are your other clients other than the top telecom client responding to these news and these actions? Are you seeing any pullback from them or are business as usual over there?

Tiak Koon Loh

I would say that has been positive. I mean, there’s really about 8 to 10 cases of wins that we would have not made if not because of the combined company. Now this [inaudible] few in the early stages we go. We’re starting off with something. And it’s all resulting on this fact that I think the combined company, obviously, is by far the largest IP outsourcing company in China. So it creates a lot of confidence in the number of our significant clients.

But more importantly, I think that both companies have specific unique capabilities. For example, VanceInfo has a BPO capability and we’re really closing a couple of deals on the BPO side. VanceInfo has infrastructure management capability which HiSoft did not have, and we are able to leverage that. HiSoft has an SAP team, fiber [ph] SAP team and we’re able to leverage that in a number of accounts.

So I really think that’s happening. And this is one of the reasons that Sidney was trying to explain that I think the revenue synergy were keeping only in second half because we are seeing the building play out right now and the pipeline is strong, but they would not really materialize in a significant manner in the first half of 2013.

Amit Singh – Jefferies & Company

All right, perfect. Thank you very much.

Operator

All right, thank you. And our next question comes from the line of James Friedman from SFG. Please go ahead.

James Friedman – SFG

Hi, thank you. So it seems by my calculation Huawei will be about 6% of revenue for the full year. Should we anticipate this client going below 5% of revenue in 2014?

Sidney Huang

So I think, James, it is a good question. We obviously will be fully cooperative with this customer and continue to serve it if it continues to defy [ph] our services. But right now, we don’t really have much visibility beyond the near-term six months. What customer has told us that let’s shift some of the business and we can keep half. So that’s all we know at this point.

James Friedman – SFG

Let me ask it this way. How many clients do you –

Tiak Koon Loh

Let me answer it, Jimmy. So if it’s active in the 6% and they have other revenue continue to increase, right, so we probably don’t expect this business to grow anymore. So on a percentage basis, it should, it should go below 5%.

James Friedman – SFG

Okay. So how many clients would you anticipate will be bigger than this client as we exit this year?

Tiak Koon Loh

Jimmy, we do have other significant clients. As a matter of fact, we have one good [inaudible] client that’s really getting to that level, but not, I don’t know, Huawei was already extremely large, is that right? But we are getting clients that are getting to that level. We have also a number of significant clients that are beyond the $25 million level already. So we don’t see them getting because of the $100 million level very soon.

But we are definitely – with this event, as a matter of fact, the client concentration situation improved dramatically, is that right? I think we could position the ropes [ph] across nicely. We would also see over time an improvement in the DSL. But in the short term, obviously, DSL is something to improve because the denominator on the revenue part is not exactly growing. So the cash flow should also be a positive thing.

So I think the challenges that we have right now is rather uncertainties. The uncertainty, let me describe to you this way. If you forfeit, your revenue is going to drop down by $40 million. It’s very important to know when is it going to drop down by $40 million because you know exactly how it’s going to drop down by $40 million. You could actually do something to try to condition the [inaudible] elsewhere. But if you don’t have absolute control of the timing, then you know the start of bench.

But the impact is not even benched. The impact is in a number of the situations, the resources are in a city whereby we do not have a lot of other trend [ph]. So I’ll give you one example. There’s a number of these resources are in a city called Nanjing, is that right? We don’t have a lot of price in Nanjing and you cannot take those resources in Nanjing and send them to Beijing. So what do we do? We have to pay them, receive them and take them up. And typically what you do is call the Impact 1 [ph].

So [inaudible] with these two years is paid on three months, and it’s a huge impact. The impact on the margin is tremendous. So one of the drains that we saw on our Q4 margin and computed Q1 and to our Q2 is obviously the impact that we are seeing for the downsizing of this business.

James Friedman – SFG

Yeah. No, that’s a good answer, TK. Given the circumstances, that makes sense. And then I noticed that you brought back quite a bit of stock in the quarter. Could you update us on how much you have left, Sidney, and what the duration of that is?

Sidney Huang

Yeah. We announced the buyback plan for $30 million in late 2012. We’ve buying through the 10b5 plan. So if the price continued to be weak, we actually are prepared to step up the buying effort. We still have more than $25 million. It’s still a very large cash for this buyback.

James Friedman – SFG

Okay. All right, thank you very much for the update.

Sidney Huang

You’re welcome.

Operator

Thank you. And our next question comes from the line of Dick Wei from JPMorgan. Please go ahead.

Dick Wei – JPMorgan

Hi. Thank you for taking my questions. First question is on the wage inflation outlook if you can comment on the situation that you’re seeing. You obviously mentioned about the low attrition rate, but I want to see how it’s going to be in 2013. Thank you.

Sidney Huang

Yeah. In my sense, wage inflation is actually moderating. Given the economies have been decelerating not as much as in like two years ago and also the Internet bubble has somewhat burst, especially in the VC investing area, so we do not see a very high pressure on wage inflation at this point.

Dick Wei – JPMorgan

Great. And how about the lower city penetration right now as a percentage of headcount?

Tiak Koon Loh

We would have – I don’t have the exact, but I can give you the rough number. We would still have a good 30% plus to 40%, 30% plus of our population in the tier-2 city. Obviously, our blend this year will be to add on with – obviously, it doesn’t make sense to move resources. So the growth of our business is more [inaudible]. Now, it’s started coming in from the tier-2 city. And we have always guided our plan, is ultimately to maintain a good balance.

I think we try to get to also 50-50. And the reason being is that the domestic business typically needs the resources to be [inaudible] in the tier-1 cities. So no matter what you do, as long as you have a very strong domestic business, you need to have a significant portion of that resource to serve that domestic business in that tier-1 city. So we do have a way to go.

Dick Wei – JPMorgan

That’s great. Lastly, just for the two, since the BFSI vertical has been going very strong, I wonder if you can share, add some more color in terms of customer concentration or maybe a domestic business overseas concentration for the BFSI segment. Thank you.

Tiak Koon Loh

Yeah. I think the BFSI, let me split it into two. I think at this moment, I’m very excited about this MOE. That our combined portfolio on MBOSI [ph] is on the mid-20’s which should definitely put us at the not just financials but the list of ITs, the major [ph] player in China. But what’s even more exciting is that our domestic piece is growing very rapidly. I believe that we are reaching [ph] to the level whereby to form or move [ph] revenue in [inaudible], we are also doing neck to neck [ph] with the previous leader.

And we believe that we are definitely in a good position to even increase our market share in that area. And a lot of that have been driven by I think the investment that both HiSoft and VIT has make previously. If you remember VIT went aggressively into after the long-term [inaudible] solutions around VI and other banking solutions where HiSoft even [inaudible] 2010 that they invested heavily [ph] in building a number of banking solutions of our payment we finance [ph].

So this is a bit being [ph] a strong engine of growth. And when you look at the 85 significant [ph] declines that we have acquired in 2012, we’re already beginning to see a good number of build [ph] coming from the domestic banks. But based on the client [ph] concentration, not just banking clients still sitting very nicely at a 2% to 3% level so, we don’t have that issue.

Dick Wei – JPMorgan

Great, thank you very much, Tiak. And Sidney, thank you.

Operator

Thank you. And our next question comes from the line of Joe Foresi from Janney Montgomery Scott. Please go ahead.

Joe Foresi – Janney Montgomery Scott

Yes, hi. This is Joe Foresi. And for Joe [ph], thanks for taking my question. I was just wondering if you could talk a little bit about the pricing environment with your domestic clients versus your clients in Europe, and North America and Japan.

Tiak Koon Loh

Okay. So I could not separate it [ph] one by one. The domestic situation, I think we did see actually some parties like [inaudible] couple of clients whereby we have been able to increase the rate in China. Typically every year you see a bit [inaudible] and the client was certainly being the playing [ph], they are operating in China, [inaudible]. So we think that that is the most popular [ph] the China piece.

The US piece, I think it’s a mix bag. There are some clients who would obviously are willing to allow us to share [ph] some of the what they call the wage increase and be able to bring up the price a bit. But there are clients that obviously are not ready to do so.

In the case of Japan then we can’t do that, is that right [ph]? And I think the reason around that is that it’s purely that I think a number of the Japanese company themselves are going through some very tough time [ph] and they are extremely sunset [ph]. As a matter of fact Japanese companies are increasingly concern with the whole pieces of [ph] outsourcing to China because with the currency depreciation situation they realized that if that [inaudible] to Yen100 to US dollar or 105 [ph]. The pieces [ph] of outsourcing to China would not work because the Chinese player cannot make a decent margin. The Japanese does not want to pay more.

Now, would [ph] that means that they have to head out to Vietnam and whatever, is that right? So I think that situation must be tough [ph].

Joe Foresi – Janney Montgomery Scott

Okay. Thank you. That’s helpful. And just to follow up on, going back to the utilization and the transition from with Huawei, is there any thoughts on your assumptions on hiring with respect to your 2013 guidance? Or you’re just going to wait to see how utilization works with the transition?

Sidney Huang

Right. I guess hiring we do have interns every year. So those are [inaudible] deserve for full time staff and currently we are still hiring. We have hundreds of openings because as Tiak mentioned that not necessarily some of the staff from telecom customer [ph] can be redeployed to other service lines. So we are hiring. And in terms of the exact number, it will be more or less a function of our revenue growth which we indicated at least 17% growth, excluding the Huawei business.

Joe Foresi – Janney Montgomery Scott

Okay. Thank you very much.

Sidney Huang

Sure.

Operator

All right, thank you. And your next question comes from the line of David Grossman from Stifel. Please go ahead.

David Grossman – Stifel

Hi, thank you. I just wonder if I could just follow up a couple of other [ph] questions that were already asked. And the first is the timing of the Huawei transition. Do you expect the run rate of the business to approach kind of that steady state if in fact it does stabilize at down 40% by the end of June? Or are we going to do some more transfer if you will in the second half of the year?

Sidney Huang

Yes. The current plan is to complete the transition in the first half. And by the end of first half, we should be down to around 50%. So because Q1 is still on the way down so that’s why hopefully the basis [ph] that we’ve set in at least 40 [ph] but we are actually going down to 50 on the long rate by the end of second half, I mean, by the end of first half, that’s the plan.

David Grossman – Stifel

Okay. And what are your thoughts about what the fall out [ph] from Japan should be is that you think something that could stabilize by the end of June? Or do you think that’s something that could easily impact with second half of the year as well [ph]?

Tiak Koon Loh

David, if I’ve been dealing with Japan as the follow up [ph] business on many of them [ph], it provides many things [inaudible]. And I think Japanese client are the most pretty [ph] client that we can never [ph] have. And unlike the currency issue get really our way [ph].

I honestly believe that the political party just the issue that slowed up a bit is not the base [ph]. And hopefully with the common gate [ph] fully in place, I think things get back up [ph] because of some quartering [ph] happening right now.

So the rate [ph] on the Japanese piece is really the currency issue. And that is something that we cannot deal with [ph] in the short-term. But the political one, I don’t think it’s going to be in a longer run a big issue.

David Grossman – Stifel

Okay. And then in terms of the margin guidance, I think you reiterated your target of at least 75 basis points of improvement by the end of June and 200 at the end of six quarters. And obviously we’re starting at a lower point than we probably thought we would be exiting the year. But that said, how much visibility do you have right now and at least getting to the 75 basis points again, by the end of June?

Tiak Koon Loh

Yes, David, let me clarify, 75 basis points is on SG&A [ph] savings, okay? So if you look at SG&A expenses as the percentage of revenue, we will realize 75 basis points, exactly a very visible because we have cut down the redundancies. We have seen for all the areas that we can cut back and optimize.

So but the question is more actually on the margins. But margins will have more moving pieces, right? So we mention about the currency effect that Yen currency effect along will have a 120 basis points impact. And then you have some short-term impacts on the telecom customer action [ph] transition.

So that’s why the first half is not looking good. But I think if you [ph] look at fundamentally, the business is healthy and specially the order momentum, the customer momentum, we are very much encouraged by that. And as I also mentioned already that if there is weakness in our stock price, we are well-prepared to buyback more shares because we are very confident in the medium to long-term business prospect and on margin prospect [ph].

David Grossman – Stifel

Right. And just on that last point on the share repurchase, I think that question was asked earlier. But what is your share count assumption for the year that underlies your 75, 80 I think I’m [ph] –

Tiak Koon Loh

Eighty-five [ph], yes, we have that in the guidance section. I believe it’s 89 million to 90 million shares.

David Grossman – Stifel

So does that imply that the share repurchase is basically just –

Tiak Koon Loh

Actually no, we have not assume too much [inaudible].

David Grossman – Stifel

Okay. And is there any –

Tiak Koon Loh

[Inaudible] will also be a function of the stock price because when stock price move higher, then you have more diluted effect. Currently we’re not assuming a huge increase in stock price obviously.

David Grossman – Stifel

So what is the increment, Sidney, if the stock price gets back to level of let’s say 12 months ago? Is the fully diluted share count around 90 million or is it substantially higher than that, higher share prices?

Sidney Huang

I’ll have to look into the model. It could be 1 million to 2 million shares difference.

David Grossman – Stifel

Okay. And any significant change in the tax rate that underlines the guidance? And sorry if that’s in the press release.

Sidney Huang

We’re assuming it’s somewhere around, 15% to 16% for this year.

David Grossman – Stifel

Okay. And is there uncertainty around that or is that pretty visible as well?

Sidney Huang

It’s pretty visible.

David Grossman – Stifel

Okay. And then just going back to the comments about the U.S., it sounds like exiting the year, you had some larger consulting projects with some, I guess, a handful of banks that impacted at least the quarter.

Is that TF would underlie the flattish revenue growth comment for the U.S. in 2013 or is there more behind that?

Sidney Huang

Yes. David, I think what I’m saying was that the U.S. would not grow at a double digit, but it still grows a good single digit. So, the U.S. market will still grow. But obviously, we are not seeing a lot of uptight in a number of our significant clients. They’re not really increasing the budget. So there’s not being a phenomenon growth. But obviously you can see growth.

And the consulting project situation that we saw in Q4 was more of a one-time and the rest of the impact should have gone off by Q1. So, that should not with us now in Q1, beyond Q1.

David Grossman – Stifel

Okay. Just one last question on just some of those pro forma adjustments for 2013, I’m wondering, Sidney, if you could just give us a quick read on what the stock rates count and the amortization numbers would look like in 2013 from where is it today.

Sidney Huang

Yes, I can walk through with you on the model maybe on a separate call. I may not have there internally.

David Grossman – Stifel

Okay. That’s it for me then. Thanks very much.

Sidney Huang

You’re welcome.

Operator

Thank you. (Operator instructions) Your next question comes from the line of Steve Zhang from Macquarie. Please go ahead.

Steve Zhang – Macquarie

Hi. I have a couple of questions. Number one, just a little more detail on your margin this quarter and the next couple of quarters. How much of the impact was from WowWay and through U.S. consulting business? And how much strategy you expect that in the next couple of quarters?

Sidney Huang

Yes. I can tell you we probably lost 0.04 of EPS in Q4, just with the large customer. Yes, the marketing type is quite significant.

Steve Zhang – Macquarie

Okay. And secondarily, just one WowWay, what business are you keeping for that customer? And what’s the margin profile for these businesses compared to your previous overall?

Sidney Huang

Right. Well, it’s still being discussed. The customers are actually flexible in terms of which part of business will remain. But there are certainly some parts of business that we know. But there are other parts that we are still under discussion.

But if you look at overall margin profile, I don’t think there’s much difference. Let’s just assume there’s no difference from what’s been said at all what’s being domain –

Steve Zhang – Macquarie

Okay. Thank you.

Sidney Huang

On margins.

Operator

All right. Thank you. It seems that there are no further questions in queue. Does the management like to do some closing remarks?

Sheryl Zhang

Yes. Thank you everyone for joining us today. If you have any question, please feel free to contact us. Thank you.

Sidney Huang

Thank you.

Tiak Koon Loh

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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