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Innodata Isogen, Inc. (NASDAQ:INOD)

Q2 2007 Earnings Call

August 9, 2007 11:00 am ET

Executives

Al Girardi - VP of Marketing

Jack Abuhoff - Chairman and CEO

Steve Ford - CFO

Analysts

Gary Siperstein - Elliot Rose Asset Management

Perry Highland - Ann Cummins

TRANSCRIPT SPONSOR


Outsourcing The Way It Was Meant To Be

Operator

Please stand by. We are about to begin. Good morning, and welcome to the Innodata Isogen Second Quarter 2007 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President of Marketing, Mr. Al Girardi. Please go ahead sir.

Al Girardi

Thanks Kim. Good morning and thank you for joining us on our second quarter 2007 Earnings Call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen and Steve Ford our company’s Chief Financial Officer. Statements made during this conference call and answers to your questions are intended to provide abbreviated, unofficial background to assist you in your review of the company’s press release and SEC filings.

In addition, there may be some forward-looking comments regarding the company’s operations, economic performance, and conditions. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. The words believe, expect, anticipate, indicate, point to, and other similar expressions generally identify forward-looking statements which speak only as of their dates.

These forward-looking statements are based on the company’s current expectations, and are subject to a number of risks and uncertainties, including without limitation, continuing revenue concentration and a limited number of clients, continuing reliance on project-based work, worsening of market conditions, changes in external market factors, the ability and willingness of the company’s clients and prospective clients to execute their business plans, which give rise to requirements for our services, difficulty in integrating and deriving synergies from acquisitions, potential undiscovered liabilities of companies that Innodata Isogen acquires, changes in the company’s business or growth strategy, the emergence of new or growing competitors, and various other competitive and technological factors, and other risks and uncertainties indicated from time-to-time in the company’s filings with the Securities and Exchange Commission.

Actual results could differ materially from the results referred to in these forward-looking statements. Along with these risks and uncertainties, there can be no assurance that the results referred to in these forward-looking statements will occur. We encourage you to read the risk factors described in Innodata Isogen’s various SEC filings for an understanding of the factors that may affect the company’s businesses and results. Now Jack Abuhoff.

TRANSCRIPT SPONSOR

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Jack Abuhoff

Thank you Al. Good morning, everybody. Thank you very much for joining us today. We will begin with the summary of our second quarter results. Then we will discuss the business and its performance in the context of our strategy and our plan. Then finally, we’ll lay out in general terms, our expectations for the third quarter and for beyond that. Then Steve Ford will walk you through the numbers in greater detail. And when Steve concludes we’ll take your questions and your comments in our Q&A period.

Second quarter 2007 revenues were approximately $16.3 million, up 68% from second quarter 2006 revenues of approximately $9.7 million. This was our fourth straight quarter of sequential revenue increases. Our $16.3 million quarter was a 28% increase from our $12.7 million first quarter. So far this year, i.e. in Q1 and Q2 combined, we’ve generated approximately $29 million in revenues, a 45% increase from the same period last year. These results exceed the generalized guidance we gave you at our last conference call.

This quarter we regained profitability. We earned approximately $862,000 or $0.03 per share this quarter as compared to a loss of $643,000 or $0.03 per share last quarter. What’s more, because of our fixed cost structure we demonstrated our ability to deliver margins of approximately 40% on incremental revenues after breakeven. The growth we are showing is attributable principally to significantly expanding the Knowledge Process Outsourcing work we are performing for clients.

Importantly, we are categorizing approximately $4.7 million of this revenue increase as recurring revenue, bringing our total quarterly recurring revenue to $10.7 million, an 80% increase from Q2 2006. Our balance sheet remained solid with more than $11.2 million in cash, $10.5 million in solid accounts receivable, and no appreciable debt.

In terms of our outlook, we anticipate continuing strong revenue performance and sustained profitability in the third and the fourth quarters. For the second half of 2007, we are targeting a 65% increase in revenues over the second half of 2006 and a 15 to 20% increase in revenues over the first half of 2007.

Looking out further into 2008, we are confident that we will continue to deliver strong financial performance both in terms of revenue and thanks to our considerable operating leverage earnings per share.

In addition, we are presently working on several significant opportunities that we believe could further contribute to growth and to these numbers in a meaningful way. While it’s too really to forecast these wins, and too early to bake them into our guidance, we will make every effort to communicate progress on these in the coming weeks and months as we have more to report.

The fly in the ointment remained client in concentration; two large multi billion dollar clients for whom we are performing ongoing work, make up 48% of our revenues. 70% of the growth this quarter is coming from this client base, largely in the form of recurring revenues, but 30% is coming from a diversity of sources and points to the fact that our new organizational structure is firmly taking route.

In our new organizational structure, we've have formed vertical market based practices, each of which is staffed by business development team, accountable for growth. There is still work that lies ahead of us before I can say we are firing on all cylinders in terms of our business development capability, but there is signs clearly that we are heading in the right direction.

Having delivered this very good news, I'd like to digress for a few moments. I would like to talk very specifically about our vision for the company. What we are now, what we want to be and where we think we can go.

Our most significant growth area and our most significant growth opportunity, is in knowledge process outsourcing. Knowledge process outsourcing or KPO for short is a high value-added form of business process outsourcing. KPO firms provide domain based processes and business expertise, rather than just process expertise.

In our present KPO business, we help clients lower the cost to producing information and content. We are seen as a pioneer in the KPO space and not long ago we had just a few 100 full time personnel in our KPO areas. But today we have approximately 1,500 full time personnel providing KPO services and we are growing this business aggressively. It is this business that contributed $6 million of new revenue in Q2 alone.

Our clients tell us that Innodata Isogen is distinguished from other service providers by our ability to deliver sophisticated KPO services. Analysts predict KPO to be a lucrative growth category. For example, Frost & Sullivan a respected business research and consulting firm that tracks IT and outsourcing marketplaces, expects KPO to grow by compounded annual growth of 63%, moving from $615 million in 2006 to $32.2 billion by 2014.

Now as a KPO provider, we intend to distinguish ourselves in a couple of important ways. First we will distinguish ourselves, based upon how we use technology to accomplish our client’s goals. While we will rely upon on our expanding network of offshore and near shore facilities to provide cost savings, we will not stop there. Rather we will distinguish ourselves based upon our ability to create and integrate tools that both enable global work force collaboration and automate processes wherever possible.

We will further distinguish ourselves by the way we work with clients. We will continue to develop trusted relationships with the worlds leading companies. In fact we will aim to be the product development partner of choice, for our clients, helping at all for stages of product development, from inception, through maturity, through maintenance.

Given the KPO market opportunity, given our pioneer KPO status, and given our differentiated position with in the category, my management team and I believe that it is appropriate for us to target getting to $100 million in revenue in the next several years. Today my management team is more cohesive and committed than ever before and has unified around a common vision of where we can take this company.

We will get to a $100 billion and more by focusing on a few key strategies. First, we will get there by continuing to do the things we are now doing, to drive the type of growth we are now delivering. This includes, promoting our KPO capabilities and driving the changes necessary to make our company a more aggressive marketplace competitor.

Second, we will develop new service areas leveraging our existing expertise. For example, this year we have announced the launch of technical writing services and research and analysis services. Our technical writing services leverage our expertise in product and technical documentation as well as content creation and editorial services.

One of our recent wins in this area is a long-term services engagement for a leading global technology manufacturer, coordinating project managers, writers and editors in multiple locations across China, the Philippines and the United States.

Both our initial research, and the early stage marketing and sales activities indicate we struck a chord here, and we expect to make further gains in coming months. And indeed, there are many business and service areas that are adjacent to or extensions of our current services. This could include, for example other types of research services, other types of content design, and other analytical services.

As part and parcel of this strategy to broaden our services, we will redeploy our earnings and select acquisitions that support our strategy and that are accretive to earnings. We aim to consummate one such acquisition by the middle of next year.

We’ll also continue to promote and develop our technology and engineering leadership. Our engineers, the people who create our high efficiency processing environments in which we provide outsourcing services, also work directly for our clients, helping re-engineer internal tools and systems. This business distinguishes us and positions us in a highly differentiated way.

Lastly, to support our growing and changing client demand, we will continue to expand our global presence. I say continue because we now have delivery centers and offices in Paris, Beijing and just a few weeks ago Israel. In addition to the United States and in the Philippines and Sri Lanka, these are recent moves and very tied to our strategy.

I hope this digression is being helpful and is served to convey what we see as opportunity and the aggressiveness and determination with which we are pursuing it. But at the end of the day the results speak most eloquently. And it's been my pleasure to bring you these results today.

I want to thank you for your time. I'll be joining you again during our Q&A portion of the call but first Steve Ford will walk you through the numbers in greater detail. Steve?

Steve Ford

Thanks Jack. Good morning and thank you for joining us. Now let's take a closer look at the numbers. I will take you through the changes in revenue, give you an understanding of the cost structure, explain our operating leverage, review the balance sheet and then conclude with some general comments.

Revenues in the second quarter were up 28%, from $12.7 million last year to $16.3 million this year. On a year-over-year basis, revenues improved 68% from $9.7 million in the second quarter of 2006. We customarily separate our revenue into recurring and non-recurring categories.

Recurring revenue consists of services that we anticipate a client will require for an indefinite period. Approximately two-thirds of our revenue is recurring. In contrast, services for a specific project generate revenues that we regard as non-recurring. Approximately one-third of our revenue is non-recurring.

The quarter-over-quarter revenue growth in 2007 is attributable to $2.1 million increase in recurring revenue, from $8.6 million in the first quarter to $10.7 million in the second quarter. The remainder of the increase of $1.5 million in Q2 is from higher project-based revenue. Furthermore, approximately 50% of the total revenue growth is attributable to knowledge process outsourcing or KPO business.

On a year-over-year basis, the second quarter increase in recurring revenue is $4.7 million. Increase in project revenue is $1.9 million. More than 50% of this total revenue growth year-over-year is also attributable to KPO business.

And looking at revenue from a segment standpoint, our content services business generated $15.4 million in the second quarter of 2007, up $3.8 million from $11.6 million in Q1 2007. This increase reflects $2.6 million from a new recurring revenue opportunity announced earlier this year, an increased volume of approximately $1.2 million from other ongoing projects.

The Professional Services segment revenue declined 18%, from $1.2 million in the first quarter of 2007 to $967,000 in the second quarter of 2007. This decrease is the result of completed projects in the second quarter.

As the Professional Services Group completed projects, we refocused them on supporting content services revenue initiatives.

Direct operating costs increased from $8,545,000 or 88% of revenues in the second quarter of last year to $11,970,000 or 73% of revenues in the second quarter of this year. This improvement in direct operating costs as a percent of revenue was achieved in spite of incurring higher labor costs in Asia.

Even though the local rates for labor are still very attractive in the Philippines and India, these economies are continuing to grow and labor rates are rising. To lessen the impact of the labor rate issue, we will continue to move towards higher margin business and to add automation to our processes. We are also feeling the effects of a weaker US dollar versus the currencies of the Philippines and India.

During the second quarter of this year, we began putting a plan in place to mitigate the effects of the weaker US dollar on our operations. By implementing these hedging strategies, we should be able to mitigate the effects of currency fluctuations on our cost structure in the future.

Even though we have these operating costs challenges, we saw our gross margins grow from 12% in the second quarter of 2006 to 21% in the first quarter of 2007, and to 27% in the second quarter of 2007.

Selling and administrative costs in the second quarter of 2007 were up approximately $100,000 from the first quarter of 2007, as we increased marketing activity. As a percent of revenue, selling and administrative expenses declined to 22% of second quarter revenue from 27% of first quarter 2007 revenue and significantly from the 43% of second quarter 2006 revenue.

In the second half of this year, we will see a rise in selling and administrative cost from increased planned marketing spend and to meet the requirements of Sarbanes-Oxley. We became an accelerated filer for Sarbanes as of June 30th this year because our market capitalization exceeded the $75 million requirement on that all important June 30th measurement date. Even with those two items carrying a few hundred thousand dollars in each of the next quarters. I will be working on other cost control measures to keep selling and administrative cost in the low-to-mid 20% of revenue range.

On a pre-tax basis, we earned $953,000 in the second quarter of 2007 compared to a pre-tax loss of $623,000 last quarter and compared to a pre-tax loss of $2.8 million in the second quarter of 2006. Second quarter 2007 results included a $91,000 provision for income taxes, representing foreign income taxes attributable to certain non-domestic operations.

In regards to taxes, the company has established a cumulative evaluation allowance of approximately $4.4 million, which is roughly equivalent to 34% of our net operating loss carry forward for InterVal. Once we achieve several profitable quarters for U.S. tax purposes, we may be in a position to begin recognizing the InterVal as a tax benefit.

After taxes, we earned $862,000 or $0.03 per diluted share in the second quarter of 2007 compared to a net loss of $643,000 or $0.03 per diluted share in the first quarter of 2007 and compared to net loss of $2.9 million or $0.12 per diluted share in the second quarter of 2006.

Next, I will explain our operating leverage. I have mentioned on prior conference calls that we are currently running with the business with an approximate breakeven of $14 million in quarterly revenues. With our future growth opportunities in mind, we made the conscious decision last year to retain both our production capacity in Asia and our essential management infrastructure.

By retaining this capacity and talent, we are now leveraging off the established fixed cost base and mostly incur only variable cost, as we ramp up the business. The result is that we generally experienced profit of approximately 40% on incremental revenues above our breakeven point. There are several factors that may impact this 40% including product mix, currency rate fluctuations, pricing decisions, labor rates and certain selling and administrative expenses.

Looking at the second quarter, our revenues of $16.3 million are $2.3 million over the breakeven point for a calculated pre-tax profit of $920,000 at 40% of the $2.3 million increase. You will note that this calculated amount of $920,000 is very close to the actual pre-tax profit for the quarter of $953,000. You may also apply the 40% operating leverage in comparing the revenue increase in the second quarter to the first quarter revenue of this year or in comparing the revenue increase in the second quarter of this year to the revenue of the second quarter of 2006. In both of these cases after adjusting for one-time expenses our margin on incremental revenues is in the 40% plus range.

Now, let's take a look at the balance sheet. We ended the quarter with cash of approximately $11.2 million, down $1.3 million from March 31, 2007. To better understand the change in cash, you should start with our March 31 balance of $12.5 million to which you can add $862,000 in profit and then subtract the absorption of cash in the balance sheet, namely the $2.1 million of increase in other net assets, which is primarily the increase in accounts receivable. You then arrive at the ending cash balance of $11.2 million.

The significant increase in accounts receivable is a direct result of a strong revenue growth in the second quarter. At June 30, 2007 we still maintained our $5 million line of credit and we have no outstanding obligations under this credit line. Our balance sheet remains strong with no appreciable debt.

In relation to corporate matters, I would like to comment on our strategy regarding M&A activity. We mentioned during several prior conference calls that during the first half of 2007 we were going to focus on growing the top line and driving the business back to profitability. Results for the second quarter are good indication of our progress. Given the solid attraction, we have achieved so far this year I will be turning my attention more in the direction of M&A opportunities in the second half of the year.

We will be looking at deals that will help us grow the top line, have U.S. based operations so we can take offshore or in a revenue size range generally from $5 million to $25 million. Of course, well priced and are accretive to earnings per share. I will provide you with more color regarding M&A activities in the future as the situation develop.

Okay. That wraps things for now. Again, thank you everyone and looking forward to your questions.

Question-and-Answer Session

Operator

The question and answer section will be conducted electronically. (Operator Instructions) Our first question comes from Gary Siperstein, Elliot Rose Asset Management.

Gary Siperstein - Elliot Rose Asset Management

Hi guys. Congratulations. Great quarter. A couple of bookkeeping items. First Steve, in terms of the receivables that Jack mentioned earlier on of the high quality receivables, and obviously it makes sense with the increase in business, do you expect to average approximately that amount or do you think some will come in this quarter or already has come in? And now that we have broken into the block will we be in a cash generation mode and start building those cash balances?

Steve Ford

Yes, Gary I would expect that our accounts receivable will grow and in relation to the revenue growth that we were looking at. We have been very fortunate in terms of the blue-chip nature of our clients. We do not have any collection issues and they generally pay in very good terms. So, I will see a certain amount of growth in receivables. I think this quarter is probably the most significant given the large rise in revenue, Q1 versus Q2. So that, that I think you can anticipate going into the future. And we are in fact collecting on net cash very well the cash that was on the balance sheet and receivables at June 30 is, of course, coming in.

In terms of cash positive generation, I think we have a good opportunity to do that, going in to the end of this year and into the beginning of 2008.

Gary Siperstein - Elliot Rose Asset Management

What was that CapEx in the quarter?

Steve Ford

CapEx in the quarter was approximately 750,000.

Gary Siperstein - Elliot Rose Asset Management

And what do you see for the next two quarters?

Steve Ford

The next two quarters is going to be a little bit heavier probably in the 2 to 2.5 million, possibly size 3 range.

Gary Siperstein - Elliot Rose Asset Management

Okay. 2 to 3 million in the back half?

Steve Ford

Back half. Yes, and it’s to do for two things. One is, of course, to support the growth that we were incurring right now, and then some of it is normal replacement CapEx that we need to do on a regular basis.

Gary Siperstein - Elliot Rose Asset Management

Okay. And that, may be I missed it, you might have said it earlier, what was the cash drain in the quarter?

Steve Ford

The cash drain, cash went down to 11.2 and we had ended March at 12.5.

Gary Siperstein - Elliot Rose Asset Management

Okay. And Steve, just to get a little more color on your thinking on the M&A side, can you sort of give us a scenario of a domestic opportunity that’s your criteria? Just walk me through it. Let me know roughly what you think you’ll pay for something with the revenues you mentioned and how you would tweak it to make it accretive to earn, I mean, accretive or even more so after you buy it with the offshore opportunity?

Steve Ford

Sure. I will be glad to. I think that the some of the key elements that we are looking for, Gary that are extremely important, one is, we need to get the solid customer base from these acquisitions. We have products to cede in and we also want to be able to work with the same type of blue-chip clients that we have now. So that’s important.

Secondly, we are not looking for anything that has already established foreign operations. We would like to have something that has U.S. based operations that we can replace, that would be one element in being able to get greater value out of it.

Third, in terms of price, I have no comments right now other than to say that we have a very good healthy list and I’ve got a good experience over the years in doing this, and have good habit of not overpaying for anything. So, but I don’t have metrics for you right now in terms of number of times revenue or times EBITDA.

And then quite honestly, we haven’t really got into it so deeply. We’ve focused on operations, as you can see, with the results of the second quarter, but certainly in the future I can give you a little bit more specs in that regard as we start to work the market.

Gary Siperstein - Elliot Rose Asset Management

Super. Thank you. Jack, can you give me some color on a little more color on the knowledge-based work that you are doing, and is there more of a premium in pricing in knowledge-based A and B? Is there a less price competition that you are seeing in knowledge base, so it’s helping us on both fronts?

Jack Abuhoff

Yeah, absolutely. If there are fewer credible competitors, when we compete for this business we win largely, and it’s a much better use of our assets. So we precede to resource our revenues are much higher than they are when we are doing some lower level activities.

Gary Siperstein - Elliot Rose Asset Management

Do the fact that we have a substantial asset in the Philippines, it is and I don’t know maybe this is more call centered than anything else, but is the Philippine accent come into play at all or is that just with call centers and we are all about knowledge?

Jack Abuhoff

That’s all about call centers. That’s where that comes into play. The work that we are doing is analytical work. It’s a knowledge based work. There is not an accent issue.

Gary Siperstein - Elliot Rose Asset Management

Okay. And so when we go out on the project side that’s not knowledge based, you are saying basically, by default, from what you said earlier that we are seeing more competition both in terms of competitors and more competition as to pricing whereas knowledge based because its newer, we perhaps have a head start and there are fewer competitors, so pricing is better?

Jack Abuhoff

Yes that’s right.

Gary Siperstein - Elliot Rose Asset Management

Okay. And can you give us some color? You talked about some interesting potential opportunities in the pipeline that aren’t baked into the numbers yet. Can you sort them in the various verticals, give us a little more color on what kind opportunities there are, and if those opportunities have grown since the last quarter?

In other words are we seeing more momentum in the marketplace displayed, with the turmoil, with the stock market, and the mortgage, and the questions about the U.S. economy? Can you sort of give us if you have seen any weakness, due to that stock market turmoil and what’s going on in each of the sectors?

Jack Abuhoff

Right. I think what we are seeing Gary is the benefits of the reorganization that we did. So as we formed the company into a vertical market focused practices that run their own business development activities, and are a cannibal for growth, but what we've seen is a much more energized market phasing organization and a much more focused one, that’s much more deliberate and strategic in the way it approaches opportunity.

So I think we are a much more viable competitor. That’s where our growth is coming from and that’s where all of these new significant opportunities are coming from also. We are still at a stage where I don’t think what goes on the mortgage markets affects us frankly.

Gary Siperstein - Elliot Rose Asset Management

Okay. So any perception of the U.S. economy slowing and if some of that really impacted us at this point?

Jack Abuhoff

No.

Gary Siperstein - Elliot Rose Asset Management

And when you talk about the opportunities in the pipeline, can you give us a little more color? I mean what are they dealing with in each vertical and who some of the potential competitors are?

Jack Abuhoff

Sure. I am going to speak necessarily in a general way of course, because these are things that are in the works. The opportunities all are having to do with knowledge process outsourcing. One of the opportunities has to do with a large scale systems initiative for content technologies with a very high profile, new customer.

And all of these speak to our strategy. They are all examples of companies that are looking to outsource analytical types of activities at a large scale. And some of these are fairly late stage good companies who have been working through a vigorous process, i.e. to determine that we are their partner of choice or on a very short list.

Gary Siperstein - Elliot Rose Asset Management

Can you give us Jack, some color on the amount of people in sales force now and I know that’s changing number and people leave and new people come in. But can you give us some color on your confidence in their results? In other words what’s going on in numbers, is it 3 or 5 or 7? Are they improving quarter-by-quarter?

Jack Abuhoff

Yeah they are and that’s of course the work-in-process. We’ve got about 13 people right now in the sales force and we are seeing some good things coming out of that sales force. And more so, we are seeing good things happening from the way they are now integrated into our new organizational structure.

Gary Siperstein - Elliot Rose Asset Management

Super. Okay. Last question and then I’ll give someone else the chance. If the market wasn’t down a 150 today, the stock and those kinds of numbers would travel the upper point. As the earnings have come out here, I have seen a lot of other public companies show less revenue growth and lesser change in the bottom-line year-over-year and see the stocks up 10%, 15%, 20%. Can you tell us, not withstanding the stock market what you got planned on IR front, now that you are starting to deliver?

Jack Abuhoff

Yeah. We have already we initiated, we are engaged on the IR front. In fact, this in the past just several weeks, we went out on a number of visits with some new portfolio managers, who expressed interest in what we were doing and I think we got some very good traction there. And that’s just the start of it. So we’ve kicked off those activities. We intend to build on that momentum and see increased activities in the coming months.

Gary Siperstein - Elliot Rose Asset Management

Super. Congratulations again. Great quarter and great progress.

Jack Abuhoff

Thank you Gary.

Al Girardi

Thanks Gary.

Operator

(Operator Instructions). We will go next to [Perry Highland] with Ann Cummins.

Perry Highland - Ann Cummins

Hi. Good morning everybody.

Jack Abuhoff

Yeah. Good morning.

Perry Highland - Ann Cummins

And again outstanding quarter and anyways the IR question was answered for me. What do you see on the government side of your business? I know last quarter I think you had your first order there and that looks like it could be something that will grow significantly?

Jack Abuhoff

Well we have got, what we think is, is most of the, the large things in place that we need to have in place in order to mix that growth significantly. I think in the next several weeks there will probably be an announcement about a high profile individual joining that practice, who will further help build the team that's going to pursue that business very aggressively. But we have got everything in place programmatically and require reference ability to expand that significantly, especially in the intelligence area.

Perry Highland - Ann Cummins

And then Abuhoff, any can comment on like the British Library? I know there was an announcement recently.

Jack Abuhoff

There was, it's a very exciting program that we are putting in place there. That we were tied in pursuing and we are very excited about. It's a true strategic partnership where we are going to be working with them to pursue certain types of business, as their selected conversion partner. It's really the two, put a number on it per se but we are already seeing the deal flow.

Perry Highland - Ann Cummins

Alright. Thank you.

Jack Abuhoff

Operator, we'll go next to Joe First, First Associates.

Joe First - First Associates

Good morning gentlemen. Again congratulations on excellent progress you've made. I just have one question and one comment. I was trying to see how much of the business is recurring and I was curious. Are these types of customers where there is recurring business, can continually increase or else can get you to do more and more work or is it more a constant type of number?

Jack Abuhoff

It's very much work that can increase, and in fact when you look back on our history in the area, what typically happens is the company decide it's going to do a certain amount of business with us. We run that for a while. And as we gain their confidence and they experience the benefits of the relationship, the economics and even the quality benefits, quality [things first], they increase the engagement, they increase the program. So that there are two fundamental positive characteristics about the KPO business, the first is the recurring nature and the second is that it tends to blossom. It tends to expand.

Joe First - First Associates

Thank you. And then also I noticed, of course the key thing is profitability and right know you are able to bring down it looks like 5% for the bottom line and given what you said Steve about the increased numbers and profitably above that. It looks like if you get up to $20 million in a quarter in sales, you are fairly pretty close to 10% to the bottom line. Am I doing my numbers [like I have seen recent one], I think you might be able to get there probably some time next year?

Steve Ford

I think you are doing your numbers just fine Joe. And those kind of numbers, it's a new territory for us and it's a good one to be in. But I think that as we scale the business up and as we continue to grow the top line and using your $20 million is as good as any number right now. Yeah, I think our range is, as you can see we are able to do 5%. We will be able continually improve that and 10% is a reasonable target for us to look at with that kind of revenue level.

Joe First - First Associates

Certainly. Thank you and again congratulation on the progress you have made, too much appreciated.

Steve Ford

Okay, thank you.

Operator

(Operator Instructions). It appears there are no further questions at this time. Mr. Abuhoff, I'd like to turn the conference back over to you for any additional closing remarks.

Jack Abuhoff

Sure. Thank you. Thanks everybody for joining us. I will just quickly recap today's news. 68% growth in Q2 alone year-over-year, 20% quarter-over-quarter, 80% growth in recurring revenue year-over-year, so that we are not doing $10.7 million a quarter of recurring revenue. It's our fourth straight quarter of increasing revenues. We regained profitability. We have shown that 40% of incremental revenue goes to the bottom line for modeling purposes. We've shown that the growth is coming from KPO, where we are recognized leader in that. This is the growth space projected to be at $32 billion market by 2014.

Late last year, we saved $1 million a quarter from our SG&A costs we have held to this and we have shown that we can hold to that and grow substantially at the same time. We have put in place an organizational structure that's designed for competition and its taking roots and delivering on its promise. We've also said there are more big deals in the works that we have not baked into out guidance.

Clean balanced sheet, $11 million in cash and another $11 million in good receivables. We are giving guidance of 65% increase in revenues in second half 2007, which is 15% to 20% over first half and we have said that we believe it's appropriate as management team to be targeting a $100 million in next several years. Also mentioned, we are reengaging our acquisitions program and that we have reengaged our Investor Relations activities and that's it for our call. Thank you for joining us.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

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