iGate Corporation Q3 2007 Earnings Call Transcript

Oct.25.07 | About: iGATE Corporation (IGTE)

iGate Corporation (NASDAQ:IGTE)

Q3 2007 Earnings Call

Oct 25, 2007, 9:00 a.m. ET

Executives

Mr. Sunil Wadhwani - Chief Executive Officer and Co-Founder

Mr. Phaneesh Murthy- Chief Executive Officer

Mr. Mike Zugay- Chief Financial Officer

Mr. N. Ramachandran - Chief Financial Officer

Analysts

Bryan Kinslinger - Sidoti & Company

John Myetta - Needham & Company

Tim Brown - Roth Capital Partners

Vincent Colicchio – Noble Financial

Operator

As a reminder we will not discuss further guidance during the quarter in one-on-one meetings or calls and we have no intention at this time of updating our guidance as circumstances change.

I will now turn the call over to Sunil.

Sunil Wadhwani

Thanks, Patricia and good morning everyone. Thanks for joining us. And again to reiterate, we have with us on the call, in addition to myself, we have Mr. Phaneesh Murthy, who is the CEO of iGate Global Solutions. We have Mike Zugay, the Chief Financial Officer of iGate Corp and we are also honoured to have with us Mr. Ramachandran who is the Chief Financial Officer of iGate Global Solutions or iGS. Ram, thanks for joining us on the call.

As usual, we make some opening comments about our quarterly financial results and the market environment. Phaneesh will provide details on iGate Global Solutions and what is happening there. Mike will review our balance sheet and then we’ll open up the call to any questions that you might have.

High level, overall, we are quite pleased with the steady progress that we are making at iGate Global Solutions or iGS, our offshore company which is allowing us to better leverage our cost structure and to make fairly significant profitability gains despite somewhat modest revenue growths. We’ll come back to that, but let me give you first of all some details for our consolidated entity, iGate Corp.

Consolidated revenue for this quarter increased to $76.1 million compared with $72 million in the same period last year and it was flat with our second quarter levels. This quarterly year over year revenue growth was due to offshore billing volume increases, project expansions and slightly higher average billing rates at iGS.

Consolidated gross profit margin for the quarter increased to 29% from 25.6% in the same period last year and from 28% in the prior quarter. This was due to higher gross profits at iGS due to higher revenues, higher average billing rates as I mentioned, the shift of more projects to a higher percentage of offshore work which is more profitable, tighter control of direct cost and increased utilization rates.

Third quarter SG&A expense of $7.1 million was 22% of revenue. This compares with SG&A expenses $17.3 million or 24% of revenue in the sequential quarter. We continue to benefit from containing our discretionary cost and we are pleased with our ability to leverage our cost structure at iGS against the higher revenue levels that we’re seeing.

Third quarter income from operations improved to $5 million from $1.2 million in the same period last year, and $1 million in the previous quarter.

Consolidated net income for the quarter increased to $4.3 million or $0.08 per diluted share from $1.6 million or $0.03 per diluted share in the corresponding period last year.

This consolidated net income doubled from the prior quarter where it was $2.1 million or $0.04 per diluted share.

Our business activity at our professional services segment which does IT staffing work here in the US declined compared with the previous year due primarily to lower placement activity of billable employees as well as seasonal vacation patterns.

Overall though this business segment remains solidly profitable, it continues to generate good cash flow.

As many of you are aware, we recently announce our board’s unanimous approval of a proposal to delist our iGS common stock from the exchanges in India.

We gave this proposal very careful consideration and believe that it is indeed best long term interest of our shareholders. The proposal will allow us to simply our capital structure for the streamline of our administrative functions and eliminate many of the financial reporting and governance requirements that they are currently subject to.

The delisting process in India requires that we acquire over 90% of the outstanding shares of iGS. iGate Corp currently owns approximately 81% of those shares. So to get up to the 90% will mean that we need to purchase about 3 million shares of outstanding iGS stock in order to reach that 90% threshold.

Under Indian securities regulations, a floor price for the shares is established based on the weekly average trading price of these securities during the 26 week period preceding the special shareholders meeting to approve the proposal. This meeting has been set for November 13, 2007.

iGate Corp reserves the right not to effect the delisting if they the share price is not of economic interest, but if successful, we expect the process to be concluded by the end of December 2007.

With that, Phaneesh, I would like to turn the call over to you for details on how things are going at iGS.

Phaneesh Murthy

Thank you, Sunil and good morning to all of you. I think from our perspective there were three main stories in the quarter. The biggest story of course was the high growth in IBITA and I’ll just come back to that in a second. The second big story was the fact that we appointed Hari Murthy who was the President of Hexaware North American operations as our Chief Sales and Marketing Officer.

Hari came with a very strong background in the ability to open new accounts in starting a number of new relationships and he’s had this ability, I think from the very early days that he worked with me and Phaneesh two months recently where he was working in Hexaware.

And then the third story, something which we are extremely proud of was that finally we are starting to be brand and from an external environment, for some of the key HR things that we are doing within the company, the DataQuest IDC Survey rated us as the third best employer in the space of all the IT companies in India.

So these are three big stories from our side in this quarter, I’ll just take you to a little bit of the details. So from an EBITDA perspective, I think we have roughly 260 basis points expansion in EBITDA from an Indian GAAP perspective in iGS and that 260 basis points expansion in EBITDA was made up of an expansion in gross margin and further efficiencies on SG&A.

The expansion in gross margin came because of a small increase in revenues, but I think lastly because of slightly higher utilization, slightly higher bill rates and slightly higher offshore percentage. So a combination of these three actually ended up in giving us a slightly higher gross margin and we continue to operate very efficiently on an SG&A side and I think while we will make some more investments on the sales side now that Hari is on board, overall, we expect that we’ll continue to operate as a very efficient organization going into the future.

So with that, I think the very strong growth in EBITDA actually has helped us a lot in going closer and closer to our benchmark profitability levels.

The market environment for the offshore services I think continues to remain strong. I think it continues to be our ability to win some of these new deals that we are hoping that Hari will help us fix.

One of the big things that we are noticing of course is the fact that many of our customers are starting to recognize the value that we are able to provide and converting the relationships to work solely with us, so that is continuing to help us in whatever current growth we are getting, we are really getting because of those kinds of things.

Higher value services like ERP et cetera continue to show good gains. On the mortgage side, I think our revenues on the Indian company basis, mortgage revenues came down to 5.5% from the 7% earlier, so that continues to be a little bit of a concern. We have come down from a number of customers to really now two large customers after the closure of GreenPoint who was another customer by Capital One, so this continues to remain a little bit of a concern. The fact that we have two large customers now versus many small customers, one large and many small, that’s probably more positive. Having said that, that does not necessarily mean that these two large customers are out of the woods, given that even much larger players than these have expressed significant let downs even as to the late of today that you might have seen in the news relating to the mortgage operations.

So that is broadly the couple of concerns that continue to be there are (1) number of mortgage customers, (2) the number of new accounts that we are adding. A lot of other things that are going really well for us and we are hoping that now that we have we believe a fairly strong HR leader in place, and we hope that with Hari coming in as the Sales and Marketing leader, we believe that we have the full complement of leadership team that we expect can be the stable base for our growth for the future.

So priorities for the future, again, continuing our focus on 14,000 clients, growing revenues and the cost of base, including gross margins and increasing EBITDA further, and I think we will continue to push for more and more employment measures to try and improve employment recruitment and retention.

I am actually going to turn the call over now to Mike for an overview of financial matter.

Mike Zugay

Our company continues to maintain a very strong balance sheet. At the quarter end, we had $100.9 million in cash in short-term investments and no outstanding borrowings.

Net cash flow from operations for the quarter was a positive $7.4 million and a very healthy $21.5 million year-to-date. Our DSOs were 75 days at the end of September compared with 73 days at the end of the previous quarter. Our depreciation and amortization expense for the quarter was $2.9 and our capital expenditures for the quarter was $1.7 million. Our largest consolidated customer accounted for 16% of third quarter revenues and our top five customers accounted for approximately 42% of our consolidated revenues.

At the end of the quarter, our worldwide headcount was approximately 7,000 people and more than 90% of these individuals are actually billable consultants. I will now turn the call back to Sunil.

Sunil Wadhwani

So just to summarize, so we are pleased with our steady financial and operational progress for this year, we remain optimistic as Phaneesh said about the demand for our services and believe that the addition of Hari Murthy as our Chief Sales and Marketing Officer at iGS will be a positive factor for our future revenue growth, and of course our focus as we’ve said will continue to be on achieving this higher revenue growth while maintaining our efficient cost structure. The only other item of course is the India delisting and we are in the midst of that process right now, and if successful, this should, as we said streamline our capital structure and eliminate the need for the multiple filings and all that we’re doing right now.

So with that, we’d like to open the call up for your questions.

Question-and-Answer Session

Operator

(Operator instructions.)

Our first question comes from the line of Bryan Kinslinger from Sidoti & Company.

Bryan Kinslinger - Sidoti & Company

As usual, I will start offshore, so Ram and Phaneesh, the first question, you’ve talked about efficiencies, (NYSE:A) Can you talk about why the SG&A actually came down quarter to quarter and after that, when you were talking about efficiencies, are you generally talking about like keeping SG&A pretty level over the next year or so, just give me a sense of how I should be looking at that SG&A line.

Sunil Wadhwani

I am going to let Ram answer specific things on that, but just to let you know, actually SG&A came down because it is comprising of two or three factors. The first factor was that we have initiated a number of Six Sigma projects in our company to streamline cost like transport that is certainly a large expense for us, renegotiating with the telecom, renegotiating with airlines and stuff like that. So a large chunk of our cost savings actually started hitting us now because some of these Six Sigma projects actually started giving us the business benefits.

The second thing was that, we actually dropped I think four or five sales people who had been there with us for two years and had not actually achieved anything, so we did that, but I think we took a large chunk of their cost anyway for part of the quarter in some ways.

Having said that, we intend to make some investments in the sales and marketing side because clearly that’s an area which we want to step up and so on, and in the past, we were not comfortable on making some of those difference because we were not making much headway with the current investments that we were making, so I think as we start getting more and more new accounts, I think we will start adding more sales people to take care of that. So that’s kind of the reason why it is so. I think it is not going to be dramatically more than the current levels, but I think it will be marginally more than the current levels, Ram, I do not know if you want to add anything to that.

N. Ramachandran

For the first time, I think we ended up sub 17% of SG&A cost as a percentage of our revenue; it was in fact 16.9%. Now, I think in the near term, we believe we should be able to sustain these levels and as we increase the SG&A in absolute terms, as a percentage of revenue over medium to longer term, I think it would come down from Q3 levels.

Bryan Kinslinger - Sidoti & Company

Phaneesh, a while ago, you mentioned a 5% sequential growth, I think, you got this on the Indian call too, first of all, does something have to change for you to resume that 5% growth and then if you can address, in terms of GreenPoint and H&R Block’s subsidiary as well, can you talk about how much revenue is left from them if there is any at all?

Phaneesh Murthy

So GreenPoint is down to zero.

Bryan Kinslinger - Sidoti & Company

Down to zero.

Phaneesh Murthy

Because Capital One basically made a decision to shut down GreenPoint, but we had GreenPoint for the quarter. For the last quarter, we did have it. And it is now for the O ending quarter that we don’t have it. H&R Block subsidiary Option One continues to be a fairly large customer for iGate. Cerberus s has put out and acquisition offer for this company. There is haggling going on on the price. Cerberus has until December 30th to decide whether they want to acquire it or not.

Because almost all our revenue which is coming from option one is on the servicing side, we think regardless of whether it remains in Cerberus or it stays with H&R Block or it ends up somewhere else, we believe that that servicing revenue maybe reasonably stable because 0% of our revenue now from Option One comes from origination. And also from that, our mortgage customer that we have, we have right now 0% of our revenue coming from origination of mortgage.

Bryan Kinslinger - Sidoti & Company

And in terms, now that that generally has stabilized, at least it will at the bottom here on this next quarter, will you start to see that reacceleration of 5% sequential growth or does something have to change in order for you to do that in terms of winning new business.

Phaneesh Murthy

I think, one of our challenges is that, unless we are adding some new customers, some of the existing customers are growing and so on, but we won’t be able to reach that level of 5% to 7% quarter on quarter growth unless we get our new account engine going fully. And that’s the lead indicator, I think, Bryan for you. If we can start getting the new account opening, even to the 5% to 7%, not even to the 8% to 10%, even to the 5% and I think we’ll be comfortable at that rate.

Bryan Kinslinger - Sidoti & Company

Okay, and then the last question for you in your division is hiring plans and in addition, I think in January you hired your new Head of HR, how has that impacted your business, have you gotten more experienced guys since you’ve made some changes?

Phaneesh Murthy

I think, the HR leader is doing a phenomenal job. I mean, we have implemented a number of organizational development initiatives. We have started a leadership program, the performance management, overall recruitment for us—all of that has become, I think, much, much stronger. We intend to hire roughly between 600 and 800 people in the next two quarters that is O&D and JFM. And we have added probably about 150 or so little less than 150 in the first six months, so we intend to do us which gives our goal at about the 800 people level which we have announced earlier, 800 to 1000 people level.

So I think on the HR leadership, I think we are doing very well, and the fact that a lot of the things that we had been doing ended up in us getting the DQ-IDC number three best employer, I think it’s kind of a proof of the fact that we are doing a lot of the right things in HR.

So HR I am not concerned right now.

Mike Zugay

Phaneesh, one of the other things you might want to mention is the same survey last year, I believe who had us ranked 29th.

Phaneesh Murthy

That’s right.

Mike Zugay

So the improvement from 29th to 3 shows exactly what’s happening.

Bryan Kinslinger - Sidoti & Company

Okay, at the kind of staffing, I have three quick questions, first of all, all of the companies are seeing weakness based on the economy and the staffing sector, I saw a little bit of margin pressure and revenues coming down, what are your expectations there and in addition, the second part of that question is how is RPO expected to ramp and will it offset some of that weakness over the next quarter or five quarters.

N. Ramachandran

Okay, first of all, the overall environment for staffing hasn’t weakened substantially yet and in fact for us for our business, it in fact seems to be stabilizing compared to two or three months ago, however, there’s no question that the whole industry, its growth is the function of the overall growth of the economy and I think pretty much everyone is saying that the US economy is slowing down and will continue to slow down for the foreseeable future.

So I do expect that overall, industry growth will slow down, I mean, right now, it is running in the mid single digits. It may come down to the low single digits and I think we will just reflect that ourselves.

Bryan Kinslinger - Sidoti & Company

RPO?

N. Ramachandran

In terms of RPO, it is growing, but I don’t believe that it’ll grow to the extent that it will be really material in terms of our overall revenues I think to the end of next year.

Bryan Kinslinger - Sidoti & Company

Okay, and the final question that I have and then I’ll get in the queue with some more, Mike is, there are some things that are moving around in terms the interest income under other income line give a sense of what happened there a little bit and then how that might change and what we should expect going forward there?

Mike Zugay

Yes, from other income standpoint, we have one major change this quarter and we’ve mentioned that in the previous quarters, but we were able to become effective with our hedging activity under US GAAP rules and regulations in India, and that became effective July 1st.

So instead of having to mark-to-market everything at the end of the quarter on all open contracts and actually book unrealized gains or unrealized losses, now because there are effective hedges under GAAP we’re allowed to now just recognize those gains or losses when the contracts actually expire and terminate. Because of that just to give you an idea, because of the appreciating rupee in the second quarter in other income, we had almost $1.5 million of unrealized gains relating to this hedging and derivative activity.

In the third quarter, we actually have virtually zero because again, we made the hedges effective under US GAAP at the beginning of the quarter as of July 1.

Now on a going forward basis, Bryan, as long as we can keep our documentation and our policies and procedures to the point where they are today, with hedging going forward, we expect in the future all our hedging activity in India to be effective hedging under US GAAP so we will have none of these P&L impact as before.

Bryan Kinslinger - Sidoti & Company

Meaning, you’ll see more similar quarters to the September quarter or the June quarter.

Mike Zugay

The September quarter.

Bryan Kinslinger - Sidoti & Company

September quarter?

Mike Zugay

Correct.

Bryan Kinslinger - Sidoti & Company

Okay, and so, over the next quarter, it maybe flat. With this quarter, and then in a way it’ll go up assuming that you get rid of minority interest.

Mike Zugay

I think what’s going to happen is our interest income has been averaging about $1.1 to $1.2 million a quarter, and when we use that cash to effect the delisting in India, most of that interest income was going to go away, but on the flip side, like you mentioned, what will happen is that the minority interest expense that we’ve been recording will also go away because we will go from an 81% owner of iGS to 100% owner of iGS. So that would be the flip flop. That would be the give and take.

Bryan Kinslinger - Sidoti & Company

Alright, thank you.

Mike Zugay

You’re welcome.

Operator

Our next question comes from the line of John Myetta with Needham & Company. Please proceed with your question.

John Myetta - Needham & Company

I just wanted to touch on iGS, and Phaneesh, I guess the first question I had there is could you talk a little bit about pricing power and do you have the ability to continue to raise bill rates going forward?

Phaneesh Murthy

Yes, I think bill rates are actually not so much of a problem for us right now, John. I think there are two or three pieces in the environment which is helping us. One is, a lot of our customers have become very strong references. The second is the rupee-dollar parity. I think everybody knows the pressures of that. The third is that the value point of our services itself has gone up and I think consequent to all of these, we are comfortable that over the next couple of years, we’d continue to raise our average bill rates, which means that newer customers may come in at higher bill rates, existing customers maybe able to raise bill rates little by little over time and stuff like that, so I don’t see pricing as too much of an issue right now.

John Myetta - Needham & Company

Okay, and then Phaneesh, excluding your mortgage business, could you just provide some commentary with regards to the broader financial services sector? What you’re seeing now?

Phaneesh Murthy

If I just look at the world broad financial services sector, we anticipated that the IT spending next year in 2008 will be relatively flat compared to 2007. In 2007, we actually think that our budgets went up by about 1.5% to 2% over 2006. But then when you break it down, you actually find that the flatness on an average is coming because of the slowdown in the mortgage side on the one hand and continued spending on the other areas, so if you are limited on the mortgage side, I think there will be a slight uptick in the spending in the financial services sector.

John Myetta - Needham & Company

Okay, and then just the last question I had, with regards to your practices around ERP and BI and some of the other higher margin services, could you talk about any specific areas where maybe you had a spike in performance or a low in performance. Was there anything that really stood out in the quarter?

Phaneesh Murthy

I think it is just that everything grew just a little, little, little. Our QA and testing services, our ERP services, our data warehousing, I think all of the services are growing just a little and our challenge is to make sure that it grows by a lot more than a little.

John Myetta - Needham & Company

Got it. Thanks very much.

Phaneesh Murthy

Thanks.

Operator

Our next question comes from the line of Tim Brown with Roth Capital Partners. Please proceed with your question.

Tim Brown - Roth Capital Partners

Hi good morning. Phaneesh, just a couple of follow up questions I had on iGS. How many sales people do you have now and what are looking to ramp that up too?

Phaneesh Murthy

I think we have 36 or 37 right now, and I think we will end up at roughly about the 45 people number by March.

Tim Brown - Roth Capital Partners

Okay.

Phaneesh Murthy

So we are trying to grow with a rough metric of between $4.5 and $5 million for the next year per person, so somewhere in the middle of that range. So most companies I think have that range between $4.5 and $5 million on an average. So that’s probably what we will want to get up to.

Tim Brown - Roth Capital Partners

Okay. Is that a new business or?

Phaneesh Murthy

No, it’s just on an average that’s the way the metric works. Some people are focused on existing accounts and some people are focused on new and stuff like that, but on an average that’s what it works out with the metric in the industry.

Tim Brown - Roth Capital Partners

Okay. And then can you give us an idea of how long once you sign a customer it typically takes for the business to come on?

Phaneesh Murthy

The business may start, but it would be too insignificant. I would say for the business to be really meaningful, it will take between six and nine months.

Tim Brown - Roth Capital Partners

Okay. And in the last yea in the Fortune 2000 type companies, have you seen a ramp up you’d expected from the new signings?

Phaneesh Murthy

We’ve seen the ramp up that we were expecting from some of the new sign-ins and a couple we are not seeing yet. So that’s our chance, and so finally, I hate to say that because of the numbers being read, if you open 10, you know that some will be stars and some will be dogs. If you open two or three, it’s a problem. That’s a challenge.

Tim Brown - Roth Capital Partners

Sure and I guess that my question will be how many stars have come out of the last year’s signnings?

Phaneesh Murthy

We’ve actually had a few stars which have come out and few are looking like theywill be stars, so for example, I know that there are two accounts which have become very solid growth accounts for us which will be in the $10 million for us as a company already that I can see and there are one or two more which are looking like they could potentially become stars for 2008.

Tim Brown - Roth Capital Partners

Okay. That’s helpful, and then just on the growth margins, do you continue to see the same pattern we should be expecting, improved gross margin sequentially until your first quarter?

Phaneesh Murthy

I think, our goal is to continue to improve gross margins, but to be honest, it’s a little difficult to predict exactly how much, so if I’ll look at some of the gross margins, as we get more and more courage that we have more work coming from North America and Europe at higher margins, for example, one of the things that we did in the last quarter was also we let go of a contract in Singapore, which was very poor gross margin, so we’ll continue to do some of that rationalization. And so I think, exactly, see last quarter, we benefited from three things; the marginal increase in bill rates, which I think will continue to get over time. But we also got a couple of bump ups in utilization and in onsite offshore percentage.

The onsite offshore percentage, I don’t think we have any more levers left. Because that at the highest level, it can ever be. On the other hand, utilization also I think has kind of reached the max. It’s really going to be more from volume increase and bill rate increase which will effectively now start improving gross margins.

Tim Brown - Roth Capital Partners

Okay, so those are two leverages there at their max. Okay, and then a couple of questions on the delisting. Do you have to buy all of the shares eventually? I think it is 5.9 million outstanding.

Sunil Wadhwani

The short answer is yes. I mean, once we get over 90% of the shares we can deal it, so in effect then, iGS becomes a private company. All of the shareholders who have not tendered their shares by the end of the delisting let’s say in December, they have another six months in which to tender their shares to us and we assume that pretty much all of them will do that because otherwise, they are sitting down holding tiny small number of shares in a private company.

Tim Brown - Roth Capital Partners

Okay, so if I did back down a little bit, I come out to $50 to $55 million total cost at the current price of iGS. Is that something that’s reasonable?

Sunil Wadhwani

It maybe a little bit higher because the way the rules operate right now, is that there are two prices that are considered. The flow of prices that I mentioned earlier is the following: We take the average of the weekly prices of the stocks for the 26 weeks prior to the public announcement. The public announcement, the “official public announcement” will be going out very shortly after this shareholder meeting that we’ll be having on November 13th in India. That establishes a certain flow of rates. Now what’s more relevant than that is what’s called a discovered price, and the discovered prices is the price at which the maximum number of shareholder tender their shares to us.

Typically that at some premium to the flow price, it’s impossible to predict right now what that premium might be and it’s just something that we’ll have to look at and decide at that stage, does this make economic sense for us or not.

Tim Brown - Roth Capital Partners

Okay. And then just on the delisting, I don’t know if you guys have run some numbers of potential savings by streamlining the structure? Do you have any idea what those could be?

Sunil Wadhwani

It won’t be a huge thing. There will be some savings from a variety of areas, but I’m guessing at the end of the day, those savings will be more in the hundreds of thousands of dollars, not in the millions of dollars. But as we said, the key reason for doing this isn’t so much the savings, it’s really streamlining the capital structure and reducing some of these regulatory requirements. We’ve been talking internally for the last two or three years but the dual listings that we have both in the US and India and did that really make sense? And we came to the conclusion that it didn’t make sense. That we should only have one listing and after some discussion, we’ve decided that the US was really where we wanted to be listed more so than India because this is where the bulk of our clients are and so on, so hence the reason to delist in India, but again, savings is a very secondary or minor reason for doing that.

Mike Zugay

One of the other positives with that is the management time and effort which can be directed toward other things rather than the public forum, so that’s an intangible that’s built into this as well.

Tim Brown - Roth Capital Partners

Okay. Got you.

Phaneesh Murthy

So just one quick thing, you talked to our 5.9 million shares, I just want to say there is 5.9 million shares, in addition I think, there is something like 1.3 million vested options.

Tim Brown - Roth Capital Partners

Okay.

Phaneesh Murthy

And then there are some unvested options. So, some of the vested options may get converted into options and some of the unvested options could be converted and stuff like that, actually, therefore to predict the amount of cash maybe slightly difficult as Sunil was pointing out.

Tim Brown - Roth Capital Partners

Okay, because these options will be automatically converted at that point.

Phaneesh Murthy

It could be converted or some of those may cash out, so you do not know what people will do.

Tim Brown - Roth Capital Partners

Okay, I think that solves my questions, thanks.

Mike Zugay

Thanks, Tim.

Operator

Our next question comes from Vincent Colicchio from Noble Financial. Please proceed with your question.

Vincent Colicchio – Noble Financial

Good morning guys, I have got a question for Phaneesh, given that we’re not at the point in new business development to grow with the 5% to 7%, what can you do going forward sequentially with your current level of pipeline?

Phaneesh Murthy

That’s a tough one to try and get to. The problem of the non-predictable model to be honest is only the fact that if you don’t have enough data points, it is difficult to predict. And that is the only reason why we have not been giving guidance. Having said that, we will continue to grow so that there is no doubt it, it’s the question of at what percentage that growth will end up. But we are focused on growth and we are focused on margin expansion. So, we are focused on both of those things.

Vincent Colicchio – Noble Financial

Okay. Strategic question for Sunil, this has been brought up before obviously, the staffing business, is there any consideration internally of spinning that business off. I know it is not the best time to be considering that given the cycle, but the business has been stable to lower this year. A separate question would be, when do we expect to see some growth there?

Sunil Wadhwani

In terms of the second part of the question, I think you will see things stabilize fairly soon. We’ve had a slight decline over the last two or three quarters. I think you’ll see that kind of stabilize and at least the declines will stop, and then they’ll grow like I said, along with the industry average, which I suspect over the next year or two will be in the low single digits.

In terms of your broader question as to what we do with that division, that’s a question that our board discusses from time to time which we do with all the aspects of our business, not just the staffing division. It is the same discussion, for example, that we had on this potential delisting that’s been underway for the last, I’d say a couple of years.

So again, staffing is something we’ll just continue looking at as we have and whenever the time seems right, if we decide to do something, we’ll certainly announce it. But as we have said it’s a profitable group. It has got good cash flow so we make the most of the twilight there.

Vincent Colicchio – Noble Financial

Do you actually have any cross-selling opportunities with your iGS and some of your staffing clients?

Sunil Wadhwani

A little bit, it’s not a whole lot because the levels at which the two organizations sell is very different. I mean there have been some leads transferred from the staffing group to the offshore group, but candidly, it’s fairly limited.

Vincent Colicchio – Noble Financial

Okay, another question for you Phaneesh. Has there been any consideration of expanding the GE relationship? Where does that stand?

Phaneesh Murthy

It is continuing to grow for us marginally, but as a percentage, I think it is down to less than 25% of iGS’s revenues. And we will continue to focus on expanding the GE relationship, but we want to focus on expanding the GE relationship at the same time bring it down as the percentage of revenue. I mean GE margins are not as great and it’s what GE expects. They expect that margins should never be good while working for GE. We want to make sure that by 2009 end when the contract is up for renewal again, we are in a much more in a stable position in terms of other percentage of revenue of business coming from GE.

Vincent Colicchio – Noble Financial

Okay, that most of my other questions were answered. Thanks, guys.

Mike Zugay

You’re, welcome, Vince.

Operator

There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Sunil Wadhwani

Okay, well I’d like to, on behalf of all of us over here, Phaneesh, Ram, Mike and myself, I would like to thank all of you for joining us. Any follow up questions or comments, feel free to give us a call and we look forward to joining you again in about 90 days. So thank you.

Mike Zugay

Thanks everybody, bye-bye.

Operator

Ladies and gentlemen, this concludes today’s teleconference you may disconnect your lines at this time. Thank you for your participation.

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