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StarTek, Inc. (NYSE:SRT)

Q1 2010 Earnings Conference Call

May 6, 2010 11:00 AM ET

Executives

Julie Pierce – Director, SEC Reporting

Larry Jones – CEO

David Durham – CFO

Analysts

Jason Ursaner – CJS Securities

David Koning – Robert W. Baird & Co.

Matt McCormack – BGB Securities

Tom Carpenter – Hilliard Lyons

Howard Smith – First Analysis

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 StarTek earnings conference call. At this time all participants in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

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

Julie Pierce

Good morning everybody and thanks for calling us. 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 2010 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 Dave will deliver prepared remarks today with some brief comments about this morning's release.

At the conclusion of their prepared remarks, they will conduct a question-and-answer session. For those of you who have not yet received a copy of today's earnings press release, please go to www.startek.com where you can download a copy from the investor section of our website. 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 Federal Securities Laws. These statements are subject to various risks and uncertainties and actual results may vary materially from these projections. StarTek advises all of those listening to this call to review our 2009 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, and according to Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found in the appendix of the earnings call, PowerPoint presentation, and on the Investor page of our website under Regulation G. I would now turn the call over to Larry Jones, StarTek's President and CEO.

Larry Jones

Thank you Julie and good morning everybody. As Julie mentioned, please download the presentation from our website and follow along. Let me start by acknowledging that this has been a difficult quarter.

The convergence of four factors has taken a toll on our quarterly revenue and EPS results. First was the closure of three sites, which we announced on the last call. Second, was the launching of four new offshore programs that we secured in the fourth quarter of last year representing over 1000 feet. Third, three of these four programs began in the first quarter and are expected to ramp over the next six months, and the other will begin this quarter. The third factor was waning demand in the telecommunications sector which was building over the last two quarters and resulted FTE reductions in a number of our North American sites. The final factor was lower Canadian exchange rates.

Dave and I will provide you a lot more color and relative impact of these factors throughout our presentation today.

Let me now jump into details starting on Page 4 which highlights our financial results for the first quarter. Revenues of $67 million represented nearly a 5% decline from the prior year and a 7% decline from last quarter. This sequential decline was driven primarily from site closures and lower demand in our telco clients. Margins declined dramatically during the quarter as a result of startup costs associated with the new offshore program launches, lower utilization in a number of our North American sites, and an unfavorable Canadian exchange rates.

In the fourth quarter, we initiated a number of cost reduction programs, both in the corporate and in the field level, reducing SG&A by approximately $600,000 for the quarter. Lower revenues and margins offset by favorable SG&A variance resulted in a quarterly loss of $3.1 million or $0.21. Cash at the end of the period was up to $27 million primarily due to a $5 million one-time tax refund.

On Page 5, we list some of the client highlights of the quarter. As mentioned earlier, the wireline sector continues to struggle as clients disconnect landlines. As a result, a number of our clients are reducing headcount, lowering future forecasts, and in some instances requesting price concessions. Revenue from our largest client AT&T for the quarter was relatively flat, with slight decreases in both the wireline and the wireless programs. Total AT&T revenues across three big business segments represented 67% of our revenue. In T-Mobile, our second largest client, revenue declined 20% sequentially due to a site closure in the first quarter and overall lower call volumes. We expect future demand in North America to be down offset by an increase in offshore.

Across-the-board, the migration from onshore to near-shore to offshore is accelerating, lowering North America demands and heightening demand for our Philippines and Costa Rica facilities, which by the year-end will represent over 3500 seats, or approximately 35% of our capacity.

Moving on to Page 6, our operations is very busy this quarter. The decision to close three sites during the quarter was motivated by a number of factors. In January, we closed our Victoria, Texas site, a loss of over 200 active seats due to the loss of a client program. In March, we proactively closed our Thunder Bay facility in Ontario, Canada with just over a 100 FTE as part of our strategy to reduce our Canadian footprint due to continued wage inflation and foreign exchange volatility.

In March, we also closed our Laramie, Wyoming facility with just under 50 FTE in our continuing site optimization effort that identifies non-performing sites and either fixes them or shut them down. And finally in April, we announced our plan to close our Sarnia, Ontario site in the fourth quarter of this year when the lease expires. In this case, we will be moving the work to another site in Canada over the next six months.

Our quality, recruiting, training, retention and operational performance remained strong. This is especially important in this environment as clients re-access their pool of vendors and weed out non-performing ones. The launching of four new concurrent client programs is always challenging and fraught with risk. During the quarter, we invested heavily to ensure these launches were successful and I'm pleased to say that to-date they are executing well, and are exceeding our and our client's expectations. Utilization for the quarter increased slightly with lower utilization in Costa Rica, higher utilization in the Philippines, and a slight increase in the US and Canada due to site closures.

As we open the new Ortigas site in the second quarter with over 2000 seats, for which we have 600 seats ramping, offshore utilization should drop until these programs fully ramps.

And finally our @Home program continues to grow nicely. As of the end of the quarter, we had over 100 FTE across four accounts. A number of these programs are pilot programs that have the potential to scale further throughout 2010.

One of the most important strategic initiative for StarTek is rebalancing our delivery platform to increase the percentage of revenue from higher margin offshore work. This effort that started in 2008 with the opening of our first facility in Makati has been progressing nicely over the past 24 months as client demand has dictated.

As depicted on Page 7, in March, we opened our Heredia facility in Costa Rica, with 440 seats. We have one program which should ramp to over 100 FTE by the third quarter and have had several prospects that could fill the site.

Makati also continues to grow. In March, we launched a large program for an existing client that we expect to ramp to over 300 seats by the third quarter.

Ortigas, our newest facility in Manila and also shown in the slide, opened in April, and when complete will house over 2100 new agent seats. Our first two programs, each with over 300 seats went live in April. The second program is scheduled to go live in June.

While there are many challenges in launching multiple new programs across multiple facilities at the same time, our teams have been able to hire, train, and ramp these programs with great success. My personal thanks to all the dedicated StarTek associates who have worked on these programs.

Now let me give you a quick update on sales and other initiatives on Page 8. Our field – sales team was very busy during the quarter. In addition to closing several new add-on contracts, that team has been prospecting a number of new opportunities. In addition, our healthcare initiative is also gaining momentum as our sales and marketing program has begun to pay off.

Recently John Damian, our SVP of sales left StarTek and we've appointed Chad Thorpe, a StarTek veteran as his replacement. With this restructuring, we have combined the embedded-based sales and the new client sales into one operation to better leverage our sales team. Previously the embedded-base sales was the responsibility of the client services team residing in operations. We expect this restructuring under Chad's leadership and the addition of more sales directors to allow us to close more business over time.

You have heard about the many strategic initiatives on previous calls. While many of these programs are progressing with their intended results, we are also focusing on initiatives that increase efficiencies and lower costs. These initiatives are intended to balance SG&A expenditures with revenues. And on the operating side, to enhance gross margins. Many of these initiatives involve investments in technology for both internal automation of our operations and for client applications. Our M&A team has also been very busy as we continue to search for smaller call center operations that we can acquire to expand our client base, our vertical market coverage, particularly in healthcare, and provide scale and reach to our operations.

During the quarter, we have seen an increased pipeline of opportunities as overall market recovery continues. As I have stated previously, we are focused on accretive deals that have minimum integration risks and could be comfortably funded.

And with that, I would like now to turn it over to Dave Durham, our CFO, who will discuss the quarterly financials in more detail.

Dave Durham

Thanks Larry and thanks to everyone for calling in. As Larry mentioned, we are disappointed with our financial results for the quarter. Our topline came in about where we expected but gross margin was down considerably compared to last quarter. We knew going into the year that we are going to have temporary headwinds due to site closures and the related costs, new site ramp expense, and a drop in Canadian foreign exchange rates. What we didn't see coming was a decline in North American wireless demand and customers protecting their internal centers, while also shifting volume offshore at a more rapid rate. We were also hit with weather-related site closures in a couple of locations, and the final unforeseen margin hit was the need to spend more on the launch of new offshore programs to ensure early success, an investment that we hope will lead to significant incremental follow-on work later in the year. As a result, after four consecutive quarters of profitability in 2009, we dipped back into negative EPS territory.

Moving on to the details outlined on Page 10 of the presentation, revenue for the fourth quarter totaled 67.4 million, down 7% compared to last quarter and down roughly 5% compared to the first quarter of 2009. Gross margin was 10.6%, a 560 basis point decline compared to last quarter and down 460 basis points compared to Q1 of 2009. SG&A totaled 10.9 million or 16.2% of revenue, a decrease of 600,000 compared to last quarter, and up 900,000 from the year-ago quarter.

We reported an operating loss of 3.8 million for the quarter compared to operating income of 200,000 last quarter and operating income adjusted for impairment restructuring charges of 1 million in the first quarter of 2009. On a per-share basis, we lost $0.21 this quarter compared to earnings of $0.06 per share last quarter and $0.04 in Q1 of 2009.

As Larry mentioned, the quarter was disappointing and Slide 11 provides the bridge from Q4 that helps explain several of the factors that caused the revenue and gross profit declines.

In terms of revenue, site closures in Laramie, Victoria, and Thunder Bay accounted for an expected $2.6 million decline and lower call volumes from our wireline customers translated to a $1.2 million decrease. In addition, one of our large wireless customers also delivered less volume to us which caused a further decline of approximately 1.5 million. The combined wireline and wireless volume declines also translated to a $1.5 million sequential decrease in gross profit. In addition, we spent approximately 1.8 million on the launch of three programs in Philippines and one in Costa Rica. The cost was higher than expected, however, all four programs are progressing nicely, and we are hopeful that the incremental expense incurred to ensure successful launches translates to more incremental work in the future.

And a final large item that negatively impacted gross profit was the effect of the US to Canadian dollar exchange rate, net of our hedges, which negatively impacted gross profit by $900,000.

The change in current quarter revenue and gross profit compared to Q1 of 2009 outlined on Slide 12, highlights the dramatic impact of our site optimization strategy as our North American site closures in Regina, Laramie, Thunder Bay, and Victoria, negatively impacted revenue by 4.5 million, but actually contributed positively to both gross profit dollars and gross margin.

Conversely, our new sites in Makati, Costa Rica, and Ortigas, contributed incremental revenue of 2.5 million on a quarter-over-quarter basis, but due to the significant ramp cost of our four new programs, gross profit was negatively impacted by 1.3 million and margins fell by 220 basis points. Our expectation is that these programs will be contributing – will begin contributing positively to our results later in the year and will be the primary catalyst for our expected return to overall profitability.

The other significant trend on a year-over-year basis is the decline in the wireline volumes, which on a comparative basis cost us 1.5 million in revenue and 1.1 million in gross profit.

Moving on to the balance sheet and cash flow highlights on Slide 13, the balance sheet remains strong at the end of March, with cash and investments totaling 27.3 million and no debt. Our cash balance, as Larry mentioned, was helped by the receipt of a $5 million income tax refund in the quarter, plus we had very strong collections at the end of March, which translated into a DSO number of 61 days.

Working capital totaled 56.5 million, our current ratio is 3.1 to 1. CapEx for the quarter totaled 4.9 million, much of which was due to the cost associated with our Ortigas site launch, and depreciation expense totaled 4.2 million. With that, I will turn the call back over to Larry.

Larry Jones

Thanks Dave. I would now like to talk a little bit about the industry trends and the outlook for the rest of 2010. On Page 15, is a list of some of the trends we are seeing. While the telco or wireline sector has been on a decline for several quarters, we are now also experiencing for the first time lower volumes in the wireless sector. This is due to slowing subscriber rates and a trend of fewer calls per subscriber. We are also observing an acceleration of offshore migrations as the recession has forced a greater focus on lowering costs in this segment.

We also continue to view healthcare as a growing sector, and a great opportunity for StarTek, particularly given the recent healthcare reforms.

Our focus on the second quarter on Page 16 is in line with the overall 2010 objectives that we outlined in our last call. Our top six initiatives are one, selling new business that will be paramount given the slowdown in growth in our embedded base. Two, at the same time, we need to build on our early successes in launching our four new offshore programs, ensure that we scale these programs successfully on schedule, and position ourselves for future work. Three, with StarTek@Home now a real delivery platform, we need to demonstrate that this is a channel that can scale by providing our clients with a better alternative to center-based delivery for specific types of programs.

Four, we will continue our efforts to optimize and rightsize our North America operations as our offshore operations scales. Five, we will continue to automate and standardize our operations through well-documented processes and new technology with the intent to provide a more consistent and efficient service delivery platform.

Number six, for two years we have now operated without a Chief Operating Officer. This has allowed me to take a more active role in the restructuring and expansion of our delivery platform and get closer to our clients. I have determined however, that the time is right to refill that position and we are actively recruiting to find someone with deep global BPO experience that can oversee our operations and take them to the next level.

Turning to Page 17, I would characterize the financial outlook for the rest of 2010 as challenging. We expect headwinds to continue for the remainder of the year due to shrinking wireline and to a lesser extent wireless demand, plus the ramping of offshore programs. These factors will continue to dampen our revenue and profitability. We will continue to manage costs and expect SG&A to be relatively flat in future quarters. Based on our assumptions that our offshore programs will continue to ramp successfully, that we’ll not see further deterioration in call volumes, and that we are successfully closing a portion of the deals in our current pipeline, we expect positive EPS in the fourth quarter and expect full-year revenues to be flat to slightly negative compared to 2009.

In closing, while we are disappointed in the financial results for the quarter, the downturn in revenue and profitability are explainable and short term in nature. Some of the downturn is a direct result of actions we have taken to improve our long-term operations, some of that is due to industry dynamics. Despite all of this, we continue to focus on rightsizing our North America operations, at the same time, we are ramping our offshore programs. This transition will require patience, but we expect to be a stronger and healthier company once the transition is complete.

Our biggest asset is our existing client relationships, our quality focused organization, our balance sheet and our ability to serve new clients. In the long-term, these assets will drive growth and profitability and result in increased shareholder value. Thank you and with that, I would now like to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Arnie Ursaner with CJS Securities.

Jason Ursaner – CJS Securities

Good morning, it's actually Jason Ursaner calling in for Arnie.

Larry Jones

Hey Jason.

Jason Ursaner – CJS Securities

On the gross margin, if I just walk through some of the quantifications that you weighed out in the slide show, is it fair to think of this that the volume decline is more recurring, I mean you talked about slower subscriber rates, and not necessarily getting worse, not expecting much improvement, so maybe 470 basis points or the 560 on a sequential decline, excluding a third of the launch impacts, since you have one more in Q2, so maybe 400 basis points is essentially one time in nature?

Dave Durham

Yes. I think the way to think about it, certainly the site closures is a one-time – weather related site closures which hit us in our Collinsville and Mansfield locations early in the quarter, certainly a one-time event. But I think if you fast forward it, our expectation would be, that the new site program launch cost would go from being a drag to having a positive comparative impact. But, kind of the big, wildcard, for lack of a better term is, what we have characterized here as wireline volume declines and large wireless client volume declines, which are more market driven than anything that we can control. So –

Jason Ursaner – CJS Securities

And you still have one more launch to go, I think you're saying at the beginning, that there is a fourth launch set to begin in Q2 .

Larry Jones

The first three launches will wrap by probably the beginning of the third quarter and the other launch will go across to second and third quarter.

Jason Ursaner – CJS Securities

And as you begin to see the improvement from these launches, you mentioned a gross margin target of 20%, and think you can get there more quickly. What’s the timeline for the current target and what was it?

Dave Durham

I don't know. I think on the last call, we indicated that we felt if we executed well on the businesses that was ahead of us that it was possible that we could hit that number by the fourth quarter of 2010. We no longer have that view due mainly to declines that we have seen in North America. So at this point, we are really not in a position to make a specific prediction on when we are going to hit that other than to say that we do expect margins to improve between now and the end of the year.

Jason Ursaner – CJS Securities

And then just on the head of sales, I know you mentioned it earlier in the call. I didn't quite hear you. What was the issue? Was it the performance related? Why was the change made?

Larry Jones

We are not commenting on the reasons. His departure was just recently and we promoted somebody from within.

Jason Ursaner – CJS Securities

Okay. I think that’s it from me. I will jump back in the queue. Thanks guys.

Larry Jones

Thank you.

Operator

Your next question comes from the line of David Koning with Baird.

David Koning – Robert W. Baird & Co.

Yeah hey guys.

Larry Jones

Hi David.

David Koning – Robert W. Baird & Co.

So I guess, since you provided the guidance, trends must have gotten a little worse through Q1, I guess you said it was reasonably in line with your expectations, but it sounds like things have deteriorated a little bit. You also have a little tougher comp in Q2 given I think 12% growth Q2 of '09 was the best of the year. So, I am wondering if Q2 of 2010 going to be the revenue growth trough, is that kind of your expectation and then from there things get a little better?

Dave Durham

Yeah I think that's a fair way to think about it.

David Koning – Robert W. Baird & Co.

Okay good. And then secondly, the last caller kind of touched on this too, with margins being weaker this quarter and several explained variances, is Q2 going to be the biggest ramp – sequential ramp in margins, given some of the stuff you’ve already spent on this quarter and then the rest of the year the gross margin ramp at least is a little slower I guess in the third and fourth quarter?

Dave Durham

I would not characterize it that way. We will have significant ramp cost this quarter just as in Q2, just as we did in Q1.

David Koning – Robert W. Baird & Co.

And then I guess, finally, on the EBITDA margin line, Q4 is obviously expected to be the best margin quarter. Should we extrapolate that as you continue to improve into Q4, that you would expect continued improvement after that number into 2011 as revenue gets back hopefully into growth mode and give more offshore capacity?

Dave Durham

Yeah I would suggest that if our – what we are calling backlog does not further deteriorate, if we are successful launching of offshore programs that are in front of us, and if we are successful, closing some of the pipeline activity, yeah, that would be the longer-term trend. But those are three pretty big assumptions to make to get there. But that's certainly what we are marching towards.

David Koning – Robert W. Baird & Co.

Okay good. I just thought of one another one. You mentioned, in the industry, just subscriber growth has been – started to slow and then cost per subscriber also had slowed. It's going to be about 18 months since the beginning of that really toughest part of the economy, I guess now. And we have seen other – your competitors also mention softness. I'm wondering why you think that at this point in the cycle that call lines started to slow down rather than 12-18 months ago.

Larry Jones

I think there's a couple of factors that I can only speculate on. I am not a wireless guru. But I think first of all a lot of the subscriber growth that's still remaining is at the low end of the market. So a lot of prepaid and not big ARPU. You can see the ARPU falling. Two, through the economy I think it took a while for people to unsubscribe phones that they didn't want. And third part, the most important is the iPhone phenomena, smartphone phenomena, which came online with a roar, just as the economy was falling, really spurred not only high ARPU subscriber demand, but also high call volumes based on the fact that it was a lot of technology and issues associated with people getting online. So I think that bubble is over. It is kind of peculiar to watch the wireless space boom through the down economy and starting to struggle through the up economy. But I think those are some of the factors that's right there.

David Koning – Robert W. Baird & Co.

Yeah that's a good explanation. Thank you,

Larry Jones

Thanks Dave.

Operator

Your next question comes from the line of Matt McCormack with BGB Securities.

Matt McCormack – BGB Securities

Hi. To kind of dovetail on the wireless subscriber. What impact, if any, do you think automation is having on lower call volumes?

Larry Jones

We watch that very carefully and the industry figures are about 9% of the call volume is offset IVRs or web or other kinds of channels. It increases half a point a year or something at that rate. So, I don't think it's dramatic. But it is continuing to chip away the call volumes but at the same time call volumes historically have been going up every year much greater than that. So the net gain in seats, historically now, and I think it's varies by segment. So it really depends on the audience where it's a young audience or an older audience, whether it's financial services or communications. So it does vary across industry segments. So I think as a mega-trend, we watch it. It is taking several points off the growth rate in the call center business, but it's not flipping it around and making it negative. And I don't attribute a lot of the recent decline in the wireless to technology offsets.

Operator

Your next question comes from the line of Tom Carpenter with Hilliard Lyons.

Tom Carpenter – Hilliard Lyons

Good morning Dave and Larry.

Larry Jones

Hi Tom

Tom Carpenter – Hilliard Lyons

If you guys ramp the Philippines, is it a 2011 or 2012 event, or you get the two existing centers, or there is a capacity utilization that you are looking for?

Larry Jones

Our expectation based upon the demand that we are seeing is that we would reach our target utilization in the Philippines sometime in 2011 and that target is 90%.

Tom Carpenter – Hilliard Lyons

Okay. Because one of the things you guys have addressed, since you have been there if you want to reach the point where new call center openings don't have the impact that they have had historically, you could impact and the margins don't suffer. And I think hopefully once you guys get that second center ramped, does that alleviate some of the current issues.

Larry Jones

Yeah I think that's right. I think the thing is perhaps unique about the Ortigas location is currently ramping. It's roughly four times the size of a normal North American location and it's more than double the size of our Makati, our first site there. So we did take a pretty big lead from an investment perspective to pursue a site that large, but again we think the demand is there to support the investment.

Dave Durham

And I suspect to your point that future sites won't be that large, so therefore the impact will be on a percentage basis not a dramatic kind of margin.

Tom Carpenter – Hilliard Lyons

That is good news and a follow-up question if you don't mind. Can you help us understand new business, you guys have touched on some different verticals. Are you pursuing those opportunities, but also talk about sales cycles, and if something has changed over the past year, year-and-a-half, generally when times get tough, companies do want to outsource more, there has been an uptick over the past year, but companies seem like they are still focused on cutting cost, just how that impacts your firm.

Dave Durham

That's a good question. I think we haven't seen any major trends in sales cycles. They vary from three months to nine months depending on the size and the predicament. The dynamic of the sales cycle is totally driven by the ability to catch a transition – a transition of management, a transition in a non-performing vendor or a transition in an offshore move. You really got to be at the right place at the right time when that predicament happens. And most of our pipeline is above that. So in this kind of economy, people are hunkering down and using their existing vendors for growth. But when they do have a vendor displacement or they do have a change of management where the door opens or they do have a offshore program and our offshore sites and reputation is pretty strong, and we have been able to really leverage that to get into the pack when somebody's taking a US program offshore. So those are our biggest opportunities. We are not seeing price pressures in the new sectors we are entering or even in the wireless sector. The price pressure we talked about was pretty localized in our wireline sector, which is only about 15% of our business. But we are seeing a lot of activity, and it's just a matter of getting to the right point and being able to sell your value.

Tom Carpenter – Hilliard Lyons

Once you do get some customers in a new vertical, how long you have to get that in a customer season before you can use that as reference win?

Larry Jones

I think six months is reasonable. I think it all comes down to having a site visit that you can show the work. We've got a number of healthcare people who have run operations internally for other competitors. We have great sales team who knows the industry. So those are two of the biggest – the piece we are missing is the reference account, and our first day healthcare win will have to be about, trust me and show them the operation, and we all fulfill the fact that in a lot of healthcare, particularly in the insurance side, it is very similar to a subscription-based support model. So we can talk about how well we do in the wireless space and kind of leverage that. But I think six months is the answer to your specific question about having good reference accounts.

Tom Carpenter – Hilliard Lyons

Thank you Larry.

Larry Jones

Thanks Tom.

Operator

(Operator Instructions) Your next question comes from the line of Howard Smith with First Analysis.

Howard Smith – First Analysis

Good morning gentlemen. I wanted to follow up on the kind of higher-than-originally budgeted ramp costs with the new programs offshore. As you get your learning curve up with offshore ramps, do you now have kind of a new baseline that you are using of a higher budgeted amount or do you think this was just for the first few and as you get new clients later this year, and into next year, the ramp cost will be less?

Larry Jones

I think just specific to the cost that we have incurred this quarter, I would suggest that we overspent a little bit for insurance sake by putting – by having more US resources travel to Manila to ensure the success. We also in these instances – we are paying for the training which we would hope in future programs that we could get some compensation for that, which would offset some of the expense. We also hired locally many of the operations manager, supervisor, and just other support positions in advance of getting the volume that would support our normal support ratios in those functions. So, three things, lack of training revenue associated with the ramp up, increased travel cost from the US to the Philippines, and higher local wage expense due to just recruiting and hiring more people than normal. Those are the three factors that are perhaps unique to this quarter and – well to the first quarter and the second quarter and we will be hopeful longer-term that we could do it more efficiently.

Howard Smith – First Analysis

Right. Got it. Thank you very much, thanks.

Larry Jones

Yes.

Operator

And at this moment, there are no further questions in the queue.

Larry Jones

Well, I would like to wrap up the call and thank everybody for your time and your questions, and we will talk to you next quarter.

Operator.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.

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