ICT Group Q4 2007 Earnings Call Transcript

Mar.18.08 | About: Sykes Enterprises, (SYKE)

ICT Group, Inc. (OTCPK:ICTG) Q4 2007 Earnings Call February 27, 2008 9:00 AM ET

Executives

Betsy Brod – MBS Value Partners, LLC

John J. Brennan - Chairman of the Board, President & Chief Executive Officer

Vincent A. Paccapaniccia - Chief Financial Officer & Executive Vice President

Analysts

Bob Evans - Craig-Hallum Capital

Josh Vogel - Sidoti & Company

Troy Mastin – William Blair & Company, LLC

Thomas J. Smith – First Analysis

Schlomo Rosenbaum - Stifel Nicolaus

Matthew J. McCormack – Friedman Billings Ramsey

Operator

Greetings and welcome to the ICT Group, Inc. fourth quarter and full year 2007 earnings conference call. At this time all participants are in a listen only mode and a brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Miss Betsy Brod of MBS Value Partners. Thank you. Miss Broad, you now begin.

Betsy Brod

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

John J. Brennan

Good morning everybody. With me this morning is Vince Paccapaniccia, our Executive Vice President and Chief Financial Officer of ITT Group. On our call today I will give you some of our operational highlights and talk about our strategic direction. Vince will review the actual numbers and then I will come back to discuss our business development accomplishments, the pipeline for new business and thoughts on our strategic direction for 2008. We will then open the call for questions and answers.

Our fourth quarter performance was in line with our most current expectations exclusive of special charges. Fourth quarter revenue totaled $112.5 million and diluted earnings per share totaled $0.06. Needless to say 2007 was a challenging year for ICT as we faced key client issues in the first quarter of 2007, a large client’s decision in April of last year to move their call handling offshore at an accelerated pace and the unexpected headwinds of the sub-prime financial crisis in the third and fourth quarters of the year. I’m pleased to report to you today that we met and overcame the issues that we faced, our client relationships improved in line with our performance improvements throughout the year, the accelerated client migration to Manila has been successful and will be completed by the end of this month which is the end of this week and the client and financial telesales business for credit card and mortgage programs that we saw in the second half of the year in particular will be largely offset by growth in collections, customer service and BPO programs from several of our financial clients who are seeking to reduce their infrastructure costs in 2008. More specifically revenue from our domestic financial services clients declined 12% in the quarter compared to last year’s fourth quarter although on a year-over-year basis our total financial services revenue because of strong growth in our international units was up. The decline in the domestic market was largely a result of the shipped offshore of domestic programs and the decline in call volumes from financial telemarketing programs. However this decline was what we had expected and in fact discussed at our Analyst Day in November a few months ago. We are today exactly where we thought we would be and I’m not seeing any further erosion in this business in the past 90 days.

We expect our domestic financial services revenue in the first quarter of 2008 will be down slightly from the fourth quarter level before results begin rebounding in the second quarter as the new programs I mentioned above within this vertical begin to come online. Despite the erosion in certain parts of the financial services sector our strength within this vertical has helped us replace lost business by offering additional value added services to our clients. An excellent example of this would be the Hope Hotline project which we were recently awarded and are currently supporting. As many of you are probably aware the Hotline service is a resource for homeowners who are having difficulty making mortgage payments. The program is run by the Homeownership Preservation Foundation, a member of the Hope Now Alliance and is composed of a number of national lenders some of whom are long time ICT clients. This triage program is designed to have our agents direct callers to the most appropriate information source to answer their concerns. It was awarded to ICT based on the recommendations of several clients who are active members of this group and knew that we had the depth within the financial services vertical and could immediately staff this program based on their experience with ICT.

At the same time during the quarter we rapidly expanded our business in the telecommunications sector through the expansion of programs with existing clients and through several new client relationships. Telecommunications sector revenue increased 36% in 2007 and accounted for 26% of total company revenue in 2007 compared to only 19% in 2006. At the same time we rapidly expanded business in our international markets which include Canada, the UK, Mexico, Argentina and Australia where combined revenue increased 35% in 2007 and accounted for 30% of total company revenue in 2007 compared to 22% in the previous year. At the same time we continue to grow and develop our higher margin and marketing technology in BPO solutions whose combined revenue grew 24% in 2007 and accounted for 11% of total company revenue compared to 9% in 2006. We have also rapidly expanded our offshore production capacity for US and international clients in 2007. In the fourth quarter of last year 58% of US production was handled at our higher margin offshore facilities a 17% increase in share compared to the 41% that was handled in the fourth quarter of 06. Similarly in the fourth quarter of 07 41% of global production was handled at our offshore facilities compared to 34% in the fourth quarter of 06. And we right sized our US capacity that you are well familiar with and the last plan center closing as part of this right sizing endeavor will be completed by the end of this quarter.

As a result of the investments we made in 2007 combined with the success we achieved in the last two quarters in capturing new business from new and existing clients in both domestic and international markets we now believe we are well positioned to renewed revenue and earnings growth in 2008.

Vince will now provide you with the financial details of our fourth quarter performance and our guidance for first quarter and full year of 2008.

Vincent A. Paccapaniccia

Good morning everyone. For your reference reconciliation tables for non-GAAP financial measures and quarterly call volume statistics may be found at the company’s website. The discussion of EBITDA, operating profit and diluted earnings per share for the fourth quarter of 2007 and full year 2007 is before the impact of the restructuring and other charges that will be addressed separately.

Revenue for the fourth quarter of 2007 decreased 4% to $112.5 million versus $117.2 million in the fourth quarter of 2006 and call volume was relatively flat totaling just under 5 million hours. The revenue and call volume decline is primarily due to a decline in our domestic financial services revenue and revenue was also impacted by the continuation of a major client move offshore at reduced revenue rates. As previously discussed in our third quarter conference call profitability in the fourth quarter was negatively impacted by training costs associated largely with the start up of a new customer and the expansion of an existing customer program. As a result fourth quarter 2007 EBITDA was $7.7 million compared to $10.8 million in the fourth quarter of 2006 and fourth quarter 2007 operating profit was $716,000 compared to $4.9 million last year. During the fourth quarter of this year the Philippine peso strengthened 6.4% sequentially and 15.4% versus last year’s fourth quarter. The gross negative impact of the strengthening of the Philippine peso was approximately $2.7 million which represents 240 basis points of operating margin and $0.15 of diluted earnings per share.

Our hedging program allowed us to recapture $1.7 million of these higher costs so the net impact of the Philippine peso on our fourth quarter 2007 results was $1 million or 90 basis points of operating margin which is $0.05 of EPS. We continue to hedge six forward quarters for the Philippine peso and peso denominated costs comprised 19% of the company’s consolidated cost structure in the fourth quarter of 2007. We generated net interest income of $157,000 in the fourth quarter of 2007 compared to $216,000 in last year’s fourth quarter primarily due to reduced cash levels outstanding during the fourth quarter of this year. Net income for the fourth quarter of 2007 was $922,000 versus $5.1 million in the fourth quarter of 06 and diluted EPS for the fourth quarter of 2007 $0.06 compared to $0.32 in the year ago quarter. Effective January 1, 2006 ICT adopted FAS 123(r) and started recording the impact of share based compensation in the financial statements. The fourth quarter 2007 financial results reflect the impact of share based compensation of $506,000 versus $318,000 in the fourth quarter of 06.

And now our adjusted charges. During the fourth quarter of 2007 the company closed all or part of four contact centers, two of which were in the US, one Canadian center and in Europe. The restructuring charges for these centers totaled $3 million. These charges are comprised of cash charges of $2.8 million for leased and other contractual obligations and non-cash charges of $256,000 primarily for asset impairment. In addition to the restructuring charges the company recorded $1 million in other charges that were comprised of the fourth quarter cost to settle a client claim, the write of M&A advisory costs and additional exit costs. At December 31st we had 13,710 work stations in operation. During the fourth quarter of 2007 we added 984 work stations primarily in the Philippines and we removed 405 work stations from downsizing call centers which represents a net work station addition of 579 work stations.

Cash increased $6.2 million sequentially to reach $30.2 million as of December 31st, 2007. DSO was decreased two days sequentially to 63 days as of December 31st from 65 days as of September 30th, 2007. For the fourth quarter of 2007 total property and equipment purchases totaled $7.5 million or 6.7% of revenue. These expenditures were largely attributed to facility improvement and technology infrastructure to support the rapid expansion in the Philippines. For the full year of 2007 total property and equipment purchases $30.8 million or 6.8% of revenue.

And now I will address guidance. For the first quarter of 2008 we project that revenue will decrease slightly versus the fourth quarter of 2007 to $108 to $112 million primarily due to reductions in the financial services vertical and the final stages of the offshore migration of a significant customer that we discussed during 2007. While there will be a reduction in training expenses sequentially the seasonal first quarter expenses are projected to cost approximately $2 million and these are primarily associated with payroll taxes, audit fees, tax preparation and costs similar to those. The combination of these factors are expected to result in diluted loss per share in the first quarter of 2008 of $0.03 to $0.07. Revenue is projected to range from $465 to $475 million for full year 2008 and full year diluted EPS is expected to range between $0.52 and $0.62 again for calendar 2008. We expect that the benefits of the company’s acceleration of its offshore expansion and a reduction of its North American capacity in 2007 will be realized starting in the second quarter of 2008 and beyond. Operating margins are expected to improve during 2008 as first we realize the benefit of the higher offshore margins, second we complete the restructuring of the North American contact centers, three we benefit from the increased and gross margin from the new contract wins in the third and fourth quarters of 2007 and fourth as we focus on reducing unpaid training and other start up costs for these new programs.

As a result of these investments and initiatives we expect that operating margins will grow sequentially each quarter during 2008 with the fourth quarter of 08 ending the year above the 4.2% that was achieved in the fourth quarter of 2006. The effective income tax rate for full year 2008 is expected to approximate 20%. We anticipate that quarterly income tax rates will continue to fluctuate based on the geographic distribution of the company’s profits in each respective quarter. The company does not expect any restructuring charges in 2008. Also we currently have 82% of our projected Philippine peso exposure hedged at this point in time for, again, full year 2008 and during 2008 we expect to add 1,200 to 1,500 net new work stations and we project that full year 2008 capital expenditures will approximate 6% of annual revenue

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

John J. Brennan

I would just like to take a few minutes to update you on our new business pipeline and also share some interesting insights from ICT’s perspective that you may want to consider as you think about ICT in 2008. New business wins in the fourth quarter totaled $40 million on annualized basis which was comparable to the very strong new business wins of comparable value that were achieved in the third quarter of last year with one difference, with these new wins are no significant unpaid training costs associated with the start up of these new wins as we were successful in negotiating in being compensated for training costs with these new programs. We currently expect to recognize approximately 75% of the $80 million worth of wins that we achieved during these two quarters worth of new business in 2008 as these programs come on board. Approximately half the value of the wins during this six month period was from financial services clients which is quite interesting and half from telecommunications clients. The new wins are also about evenly divided between the domestic US market and our international clients with about 50% of the projected revenue from them being for the US markets and the other 50% for markets throughout the world that we also serve. We believe the added revenue from these new wins will more than offset during 2008 the revenue decline resulting from the shift of US business to lower priced offshore facilities that took place in 2007 and also from the decline in telesales revenue that we have seen in the last few months from certain US financial services clients.

The pipeline for new business remains very strong across all our targeted verticals as well as some new verticals and we expect to close additional business as the year progresses which would provide the potential for additional revenue growth during the course of the year. As Vince indicated the challenges we faced in 2007 associated with closing domestic centers and moving production capacity offshore will also have a lingering impact on quarter one of 2008 as the process winds down. However we now have our infrastructure aligned with our customer needs and we’ll be in a great position in the services business going forward. In fact we’ll be completing the build out of our fifth Philippine center in the Manila area this quarter which ultimately has the capacity to support 1,200 work stations. As we are seeing demand for offshore capabilities continue to increase we are also starting to see some renewed interest for work to be done in the US as well as in Canada and in Canada particular for Canadian clients. Unlike what we experienced in the past this trend appears to be driven by desire for quality based delivery. These types of programs will require a different business model and will typically be serviced through smaller more remote centers with 200 to 300 seats as compared to the what I would call large mega US centers in the 500 to 1,000 seat range that we’ve had in the past. It would also include community based center with 20 to 50 seats as well as home based agents all of which are now cost effective solutions because as development of technology design changes and voice over IP communication links. Many of these programs are for higher value applications and would be serviced by higher paid fully benefited employees.

2007 was a very challenging year for ICT and we took some major steps to change how the company is structured. Notwithstanding the impact on profitability in 2008’s first quarter of higher seasonal expenses and the training costs associated with the program that we were awarded in last year’s third quarter I believe that we are well positioned at the beginning of the second quarter of this year to see sequential revenue and profitability improvement especially from the telco and financial services sector as new business comes on line.

With that said I would like to open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question is coming from Bob Evans of Craig-Hallum Capital.

Bob Evans - Craig-Hallum Capital

First, I just wanted to clarify, can you give us how much the Q4 training expense was? I’m not sure if I missed that.

Vincent A. Paccapaniccia

We did approximate that at $2 million we talked about last quarter, Bob.

Bob Evans - Craig-Hallum Capital

And how about in Q1 of this year.

John J. Brennan

We expect it to be about that half that rate. If you recall one of the programs for an existing client program that was largely completed in the fourth quarter but the new client program will continue into the first quarter.

Bob Evans - Craig-Hallum Capital

I’m not sure if I heard properly but, John, did you just say that your new deals are the training will be paid by the customer? Is that correct?

John J. Brennan

The deals that we closed in the fourth quarter, the $40 million deals all involved the upfront training to be paid at the training rate which basically covers costs with a slight margin to it that we certainly are working very aggressively, we can’t guarantee that they would that would be all the future wins but we are seeing an ability and a lot of push back like ICT on getting upfront costs paid for as well as trying to include [inaudible] effects, currency adjustment and so forth in future contracts. So that’s obviously a trend within the industry.

Vincent A. Paccapaniccia

The training cost that’s continuing into the first quarter of 08, Bob, relates to a third quarter win that we talked about on the October call. We said the training costs for that ramp was a very significant client win would run through fourth quarter 07 and the first quarter of 08.

Bob Evans - Craig-Hallum Capital

Also do you happen to have where you’re at in terms of capacity utilization?

John J. Brennan

We measure it in a variety of ways, looking at as a revenue per work station and it’s probably in about a $34,000 in the fourth quarter. We see most of our competitors measured as a percent of utilization and we have begun looking at it that way and we’re looking to benchmark it with expected hours per seat as opposed to just revenue per seat in the future. Past history it’s about $34,000.

Bob Evans - Craig-Hallum Capital

And can you help me a little bit on cap ex, I think you said 6% of sales which gets you a little less than $30 million but I think you’re doing 1,200 to 1,500 work stations, it seems like the cap ex is too high relative to the number of seats you’re adding. Or what am I missing?

Vincent A. Paccapaniccia

1,200 to 1,500 are net adds, Bob. So what typically happens is we’ll add, I don’t know what the number is, probably closer to 2,000 stations, something like that and then we will take some add out of commission as leases expire, things along those lines.

Bob Evans - Craig-Hallum Capital

And most of those seats will be added where?

John J. Brennan

We would expect that most of them would be added, current expectations are about 1,200 to 1,500 seats, over 1,000 of them will be added in the Philippines, we will be completing the build out of the fifth center and we have plans in place right now to build two centers outside, if you want to call them smaller, 300 to 500 seat centers, provincial centers that we’ll be adding during the course of 2008 in the Philippines. The second largest growth will be in Latin America as we’re building out more capacity for the local markets as well as for another offshore solution for US clients.

Bob Evans - Craig-Hallum Capital

And finally just on operating margins, could you give us a little bit more color, two years ago Q1 06 your operating margin was a little less than 4%. I think your guidance implies kind of a negative operating margin. I’m not sure in the revenues are comparable. Can you give us a little bit – what’s changed? I mean I know some of what’s changed but if you can give us – it seems like it’s too much of a dramatic shift. I’m just trying to get a better understanding of what’s changed.

Vincent A. Paccapaniccia

Let me look at the first quarter of 06. We did just over $113 million so revenue is expected to be down a couple million from that, Bob. I think the other, and probably significant factor is going to be the Philippine peso. Two years later it’s probably, I don’t know how much it’s increased over the point in time, but I think it’s pretty significantly higher than it was 8 quarters ago. Then the two big ones that hop off the top of my mind. We did 3.6% then, I would say the seasonal first quarter costs, I think they’re probably reasonably comparable on a year-over-year basis so I don’t expect that to be new and the last thing I would add is in the first quarter of 08 we do have one other significant center that comes to its natural lease end at the end of March, the end of the first quarter. So that is a little bit of negative drain on margin in Q1 08. There won’t be a charge when that closes because of the natural lease end.

Bob Evans - Craig-Hallum Capital

And why is that a drain?

Vincent A. Paccapaniccia

It’s pretty significantly pretty under utilized at this point in time.

Operator

Our next question is coming from Josh Vogel of Sidoti & Company.

Josh Vogel - Sidoti & Company

Could you first break down the mix of your financial services business between what’s credit card related, collections, customer service and BPO?

John J. Brennan

Because of the increased interest of our percentage of revenues that are coming from financial services we have broken it down into greater detail for people. We’re not trying to report sub-segments each quarter on this but basically we break it down between the domestic and international markets and if we look at our projections for the start up of revenues for 2007 represented about 49%, 48.5% of our total revenue in 2007 was from financial services clients. About 13% of that 49% came from international clients we placed from Mexico to Australia and elsewhere in the world. So if you drill down on the 36% that occurred in the US about 15% of our total revenue came from credit card related programs a combination of acquisition as well as I’ll call it enhancements, cross selling additional services to credit card customers. So 15% came from that, about 7% came from mortgage companies and the balance or about 14% came from a variety of retail banks, insurance companies, credit reporting agencies, financial database companies and so forth. The three major categories were credit card 15, mortgage 7 and other 14. In looking at 2008 we expect the credit card business will be down to about 12% about a $10 million drop year-over-year which would drop to about 12% of total revenues. The mortgage business has been level for the last several quarters. We mentioned this new win we got in the mortgage arena which was maybe you call it a bluebird, but we expect that business to be down $5 to $10 million compared to last year and to drop to about 5% of our revenues and where we are seeing a growth is in the insurance business. We are experiencing growth in BPO applications for retail banks, outsource customer service for retail banks and other financial institutions primarily offshore and we expect that part of our business to increase about $8 million this year and to be up to about 15% of our total revenue. So we looked at our domestic financial services business, we think it’s going to drop from about 36% of total revenue to 32% in 08. At the same time the international business is continuing strong, we continue to win new business and expand business with existing clients there and we expect to pick about a percentage point, be up at $10 million and increase to about 14% of our revenue this year. So you net the whole thing and it looks like the financial services sector will decline from about 49% to about 46% of our revenue and we see the strong growth we’ve seen in the telecommunications sector, it will basically more than offset that 3% decline per share.

Josh Vogel - Sidoti & Company

Vince, I’m sorry did you say in your prepared comments that you expect the fourth quarter operating margin to exceed 4.2%?

Vincent A. Paccapaniccia

Yes, I did.

Josh Vogel - Sidoti & Company

And I know it’s a little early at this point, but as we look out into 2009 is it safe to assume that the earnings growth and basically the quarterly break downs throughout the year will be back on track with what we saw in 05 and 06 where the second half of the year pretty much dominates the bottom line?

Vincent A. Paccapaniccia

Yes, that is our expectation.

Josh Vogel - Sidoti & Company

And of the 1,000 seats that you built out in Q4 how much of the $7.5 million in cap ex was devoted there?

Vincent A. Paccapaniccia

I don’t have that number right in front of me but it would include – again it’s primarily in the Philippines, Josh, and it would include infrastructure costs a large part of which we maintain in our data centers domestically. I don’t have the specific split of how much that $7.5 million is for the Philippine expansion.

Josh Vogel - Sidoti & Company

And do you have an idea of how many more seats you plan to close down in the US and/or Canada and Europe?

John J. Brennan

Our projection for that moving forward in 08 last year the net reduction of US seats was about 1,300. We’re looking at by the end of 08 to be down maybe another 200 to 300. We are seeing I’d say substantial interest not only from which was called in the past the government and healthcare clients were expanding business in the US but we are seeing clients from a variety of sectors, telco and even some financial services clients who are looking at US capacity as I mentioned. So we think it’s going to level off at about 3,500 to 3,600 stations by the end of 08 in the United States down from about 5,200 stations that we had in the US at the end of 06. Canada is kind of holding its own. We’ve seen a lot of strong local market utilization in Canada and we’ve got very strong growth, probably our strongest country growth was in Canada last year and just a very small percentage of that has been going offshore. As we mentioned earlier we’ve opened our first Quebec French speaking center last year in Canada and we’re actually looking at maybe adding another 100 seats in Canada. We’re also supporting clients in the UK from Canada where maybe Canada looks expensive compared to the US today, it’s still a 20% to 30% price advantage over doing work in the UK so we’re using at as sort of a nearshore solution for the UK market.

Josh Vogel - Sidoti & Company

And what was the Canadian revenue in the fourth quarter?

John J. Brennan

We have not traditionally broken out by client but I’ll give you some indication of it. The total Canadian revenue in the fourth quarter of 08 was about $89 million close to $90 million. Oh wait a second I’m giving you the wrong number there. I’m sorry, that was ridiculously high. Total Canada was about $26 million.

Vincent A. Paccapaniccia

Fourth quarter of 07, Josh.

John J. Brennan

In the fourth quarter of 07 was $26 million. We expect to be significantly North, or measurably North of $100 million of revenue in Canada in 2008.

Josh Vogel - Sidoti & Company

And was there any impact to your margins or can you quantify the impact in Q4 from the appreciating Canadian dollar?

John J. Brennan

There was a small impact but basically almost all the work we’re doing in Canada now is for Canada and the appreciation of the – and it’s a small amount of work going for the UK – so was it down to –

Vincent A. Paccapaniccia

19%.

John J. Brennan

19% of all the work done in Canada was for the US. It’ll be down to less than 10% by the second quarter of this year and only 2% of the US work will be done in Canada so we have one or two lingering clients in Canada. But 905 of the work we do in Canada is for Canadian clients now. Dramatically different probably three years ago, it was probably 50/50. The capacity has stayed about the same in Canada and we’ve been able to replace the work that moved either back to the US or to the Philippines from Canada that was US clients with Canadian clients so we’ve been very successful in Canada.

Josh Vogel - Sidoti & Company

And just lastly, Vince, did you say the tax rate for 08 was 28%?

Vincent A. Paccapaniccia

No, 20%.

Operator

Our next question is coming from Troy Mastin of William Blair & Company.

Troy Mastin – William Blair & Company, LLC

Early last year you saw some unexpected demand from two clients. I’m assuming that hasn’t happened again, just update us on that situation if you’ve seen anything unusual and are there any steps that you’ve taken in the structure of your contracts or communication channels that have had an effect on this to where you don’t anticipate to see that again.

John J. Brennan

It’s hard when the client that you have is saying I would like you to do more business because we can’t handle our call volumes, but I think basically we did. We didn’t bring that up, we did a bubble in the last year, the first quarter of at least revenues that ended up in some penalty situations in the first quarter of last year. I think we obviously are spending a lot more time drilling down on trying to understand what’s driving volumes of calls and typically in this business we are part of a network of call centers some of which are in house captive centers and some of them may be handling work with one or two other outsourced vendors with the distribution of call volumes and it can vary for lots of reasons, that’s what you’re going to get in any quarter. In general it’s been largely projectable, we’ve had some positive surprises at times and we’ve had some negative surprises of not getting the call volume that was anticipated for whatever reason in terms of the business direction of a particular client and at the other end because of a success of a particular product or a problem with a particular product or service that can drive volumes up. I think the best we can do and anybody in our position would be to stay as closely tuned to our clients which we obviously are attempting to do.

Troy Mastin – William Blair & Company, LLC

So it sounds like maybe no substantial change in the contract language to insulate you from this in the future?

John J. Brennan

When you’re in the business of servicing clients just like you’d be servicing customers so if the call volume goes up or if they lose a facility because of a natural problem or whatever whether it’s weather related or business related they certainly expect you to be a part of the solution. One of the recent ones we’ve had is one of our clients coming back to us and sort of out of the blue saying I want a 15% increase in volume which would require about another 150 to 20 people and I need them in 45 days because we’re doing a new marketing launch and expect heavy call volumes and we said well, we’ll do that as long as you pay for the training. So they’ve agreed to pay for the training so we’ve gotten I’d day more backbone in dealing with clients.

Troy Mastin – William Blair & Company, LLC

And then can you give us an update of your viewpoint on your long term operating margins? You’ve talked in he past of 7% I think when you include stock comp maybe 8% or higher when you exclude it. Do you still feel like those are achievable or have currency headwinds in the Philippines or something else knocked you off the possibility of getting to those levels in the next few years?

John J. Brennan

We certainly feel that a 6% to 8% is our target for 2010. We think that we have rebalanced the capacity of the company so that about 65% of it being done in the Philippines. We think there’s year-over-year comparability of saying well we have the revenue growth is being offset by a major shift of the work to the lower priced offshore locations. So we do believe we will have a stronger incremental revenue growth moving forward. We see a lot of that falling to the bottom line. Vince you may talk about is we’re looking at on a quarter-by-quarter basis this year of being able to control our expense levels sequentially throughout the year.

Vincent A. Paccapaniccia

Yes. With these two new centers we talked about earlier that were going to be opening up in the Philippines it’s going to be pretty much offsetting the cost of the one additional North American center that the cost will continue to impact Q1. So as we look at our expenses during 2008 the quarterly progression there is reasonably flat. And we’re taking some US denominated costs, we’re moving those offshore, we are building of course in the Philippines, we’re adding people there. But as we look at the expenses during 2008 from a facility standpoint and a staff standpoint, if we look at the major line items, the costs are not going up as the year progresses because something they’re rolling out and they’re being replaced with the new growth. So the impact that’s impact which is the other part of the margin expansion story is as the revenue increases from this $453.5 level in 2007 the quarterly revenue for growth and our model is the mid-pint there’s $470 million that is, I’m sure a lot of people are trying to do these models, I think that’s going to be a large part of the answer is you’re going to see the expenses will need to remain pretty flat to below this and that’s what we’re confirming is our expectation of these expenses that they will remain pretty flat for the four quarters of 08.

John J. Brennan

As the top line revenue comes in and throws off more gross margin we think you have very large percentages that would fall to the bottom line. Obviously as we continue to grow the top line in 09 and 10 there will be some additional costs put in there but we also have several initiatives under way to reduce our infrastructure. One of the interesting [inaudible] first companies to do it were using voice minding from the company called Utopia that we market to clients utilizing that technology to do our sales verification of both our inbound and outbound sales wins that are part of telemarketing campaigns and we’re able to reduce the labor content associated with that by about 20%. We have several initiatives under way for de-learning and work force management and voice minding and so forth that we expect over the next two years we’ll be able to pull out about $5 million of existing infrastructure costs. Plus we have moved for example about half of our software development people are offshore today and even as the peso rises the average wage rate offshore is probably one-third of what it is in the States. Even if we kept going at the same rate it would still be at least a 50% savings two years from now. So we have a number of initiatives, I think we’ve done a lot of work in the past year to reposition the company for increased margin growth. Our targets remain the same, in projecting the peso over the two next years, if it’s as bad as it happened over the last two years, we believe we’d be able to achieve our targets. It certainly is our goal to achieve of 6 to 8% within two years.

Troy Mastin – William Blair & Company, LLC

And then finally you had an M&A advisory charge in the quarter, I’m curious what that was for and if you could update us on the M&A environment now. You’ve been looking at some different transactions, haven’t seen anything really come over, if the environment’s gotten better or it’s still a key focus of yours.

John J. Brennan

The charge itself was for a significant engagement we had gotten down the road with that ended and we took a one time charge to shut it down. The second part of your question is what’s the environment? We are still aggressively looking at adding complementary BPO and marketing services, value add type companies to our mix of business and we are constantly engaged in I’ll call them negotiations, still looking to make some fruitful but basically the environment is our typical acquisition is in the $20 to $30 million range today and I would still say despite we read, there’s still a fair amount of competition for companies in this BPO and marketing services space where both domestic as well as international companies as well as I’ll them niche private equity companies are still competing.

Operator

Our next question is coming from Tom Smith of First Analysis.

Thomas J. Smith – First Analysis

Just had a couple questions on the new business wins, can you talk about how many different contracts or clients that might be with? It seems like in the quarter when you also won about $40 million in new business that it was just one or two or maybe two or three clients and that’s what’s impacting your first quarter to some extent, so I was just wondering.

John J. Brennan

We typically end up with one, two or three large ones and then we end up with a couple of ones that are in the $2 to $5 million range or $2 or $3 million that could be starter contracts with new clients. In terms of the last quarter of the $40 million close to $30 million of it was with three I’ll call them sizable contracts, one was in the telecommunications arena, it was a large US telecommunications carrier, one was with a major US financial institution that is looking to move a lot of back office work offshore and the third one was with a significant UK financial institution. And they represented combined about $30 million of value on an annualized basis. And then the rest came from three or four $2 to $3 million size deals.

Thomas J. Smith – First Analysis

And the reason you don’t expect this new business ramping that you won in the fourth quarter to impact possibly Q2 is because you’re able to secure training?

John J. Brennan

All three of those contracts that the training is being paid for. So you’ve got to build infrastructure, you’ve got capacity available, you do have to incur trainers but you’re not bearing the cost of tens of thousands of hours of unpaid training to ramp up with hundreds of people on these programs.

Thomas J. Smith – First Analysis

So going forward with the demand environment the way it is do you think $40 million in new business quarter is some of it sustainable? Or what are your thoughts there?

John J. Brennan

I’d say those are the two best quarters we’ve had in probably the history of the company and we have not included – we had one of our competitors talking yesterday about expanded business with – this is not including expansion of the system programs with clients because in some cases we’ve had some contractions of volume with certain clients, particularly in the credit card arena, but I think we’ll take it a quarter at a time. In that case they’re talking a couple hundred million dollars, I don’t anticipate signing $160 million of new business this year. I would love to do it but I think traditionally we’ve been in more the $20 million range, $15 to $25. This is a business where either you close it or you don’t close it so my expectations are we close additional business since the end of the fourth quarter so there is added business coming in that we expect to have a good first quarter and it’s only half over. Right now I feel very optimistic on the new business side but I can’t guarantee $40, I think that’d be too ambitious for ICT this year.

Thomas J. Smith – First Analysis

So what does this do to your longer term revenue growth expectations given where you’re going to be at for 08?

John J. Brennan

We’re hoping 08 is a combination of the – there’s probably $20 to $30 million of the same work, the same volume with the same clients that we are now doing offshore that was done onshore last year so that they - $20 to $30 million of revenue hole to fill by doing the same work at lower priced offshore, so that’s number one. We think that’s going to become a smaller and smaller piece as you get into 09 and 10 that really – there really isn’t much work left that is reasonably going to shift offshore so we believe that the future revenue growth is going to be more volume growth with equal revenue growth on a percentage basis. So from our perspective moving forward we would expect to get back into the 10 to 15% annualized top line growth. We’re not projecting that, that would be a target we would look for in 09 and 10 compared to where we are today as these areas balance off, as our onshore, offshore mix becomes more balanced.

Operator

Our next question is coming from Schlomo Rosenbaum of Stifel Nicolaus.

Schlomo Rosenbaum - Stifel Nicolaus

I wanted to ask, you guys signed a lot of business in the second half of 2007 and the 2008 revenue guidance seems to have been brought down where the low end is now sort of the top end or just below that and I was wondering what has changed since the last quarter that’s resulted in lower revenue guidance despite all this work that you guys have won?

John J. Brennan

Well I think there’s two things, one is we don’t want to get ahead of ourselves, Schlomo. We gave our guidance which was volume growth not revenue growth and that revenue growth at the time we did see in the fourth quarter as well as a carrying into the first quarter of the year cutbacks on the financial services credit card programs and at the same time we’ve seen a lot of it now being offset beginning in the second and third quarters with back office work but net, net revenue for domestic financial services will be, we’re now projecting it to be down for the year and probably flat if we achieve our international growth targets with financial services but that whole sector which is half our business. So we’re trying to obviously position ourselves for maybe further softness that we don’t anticipate today but we certainly want to be I’ll call it conservative. We’re looking at what’s happening in the financial services market, I mean it just makes no sense to be aggressive there. In terms of the business that we have won as I mentioned about $80 million on an annualized basis we believe we’ll be able to put in about $60 million of that will be added to the company and as I mentioned about a $20 to $30 million hole to fill in terms of just offshore pricing. Do you want to add any comments to that Vice, I mean I don’t think we’re pulling – we’re not really pulling back in terms of based on market projections, I think we’re trying to – it’s our first dollar value shot at what the number will be and we believe we’d be better off to be on the conservative side starting off the year.

Vincent A. Paccapaniccia

The only thing I would add, Schlomo, is what we’ve taken the $40 million of wins in Q3 and the $40 million from Q4, we looked at those and we have feathered them into our 2008 projections. However we have not included any 2008 wins in our 2008 projections in this $465 to $475 guidance we’re putting out there. Our thought is it’s either additive to these numbers or it can be used to offset any further declines we see from general economic or financial services sector specific issues.

Schlomo Rosenbaum - Stifel Nicolaus

Did you win any more business, any significant business that put your EPS guidance at risk because even if the training gets paid for you have other costs and debt and what are your thoughts on that?

John J. Brennan

Our thoughts right now is that we are not looking to put our EPS at risk. There is the potential of certain times we’ll have some start up costs associated with the business. I think that from ICT perspective we have to achieve the goals that we have set, everybody on this call is aware we did not have a very good 2007 and we would not anticipate taking on a huge piece of business that’s going cost us $0.20 a share this year or something like that I don’t think it’s in our interest or our investor interest.

Schlomo Rosenbaum - Stifel Nicolaus

And just a few housekeeping things, what Philippine peso exchange rate are you expecting in your guidance, what have you modeled for that?

Vincent A. Paccapaniccia

The protections we have, Schlomo, is that the peso will continue to strengthen during the year, we have it I’d say ending the year in mid-39’s. But just to add to that, we’re 82% hedged so if it’s stronger than 39.5 the impact would be about 18% of that times our costs, our Philippine costs.

Schlomo Rosenbaum - Stifel Nicolaus

You’re assuming the mid-39’s right now it’s not really much weaker than that right now, so you’re really not assuming all that much appreciation, it’s not like you’re assuming that we’re going to have any repeats or is major appreciation, right? And that’s the way I’m looking at it.

Vincent A. Paccapaniccia

That is correct. Again we do the same thing we typically do, we look at the FX economists from really our bank group members and we look at their assessments of what’s going to happen and we use that to model it, but we’re not relying necessarily on that because again the exposure would only the 18 points that are not protected at this point.

Schlomo Rosenbaum - Stifel Nicolaus

A few other housekeeping, what was D&A in the quarter? Also cash from ops is going to be another question.

Vincent A. Paccapaniccia

D&A was 6. – say $7 million for Q4 was D&A. Cash flow from operations fourth quarter was $13.6 million.

Schlomo Rosenbaum - Stifel Nicolaus

And one other housekeeping, I saw that the equity value went up like $10 million but you guys generated losses in the quarter, I was just wondering what happened in the equity section?

Vincent A. Paccapaniccia

In the equity section, obviously you don’t have the details on those, but you’ll see the biggest impact will be on OCI, other comprehensive income is primarily the valuation of the hedges, the outstanding hedges at December 31st, 2007 that will mature over the next six quarters. They need to be calculated and reported as a component of equity each quarter end and that was a very significant factor on 12-31-07.

Schlomo Rosenbaum - Stifel Nicolaus

My last question is do you have an estimate of where you expect to end to exit 2008 on a quarterly run rate of revenue?

John J. Brennan

We would expect to be in the mid-120’s. We certainly have projections that we can beat that, but we are trying to indicate that that puts us in the $465 to $475 range.

Operator

Our next question is coming from Matt McCormack of FBR Capital Markets.

Matthew J. McCormack – Friedman Billings Ramsey

Going back to the margins of the 6 to 8% that you expect to achieve in 2010, could you provide I guess a little more detail on what you’d expect the mix to be onshore and offshore in terms of revenue and then also what is implied with the margins in those different locations?

John J. Brennan

I’ll let Vince talk about the margins, in terms of the revenue mix we expect that in 08 to be about – this is for the US market – 65% offshore and 35% onshore. We think that may drop to about 75/25 or 80/20 so we have another 10 to 15% to go there. This past year we shifted 17% was the net difference so we’re looking at a much slower migration, or I wouldn’t call it migration anymore, the work that’s in the States we believe will stay here and it’s a matter of how much of the new business will be done onshore versus offshore. We believe the onshore will be 20 to 25% of our total as we reiterate the business we do with the government and the healthcare business is largely going to stay onshore and we’re actually seeing some new business that I think you’re seeing most of our competitors also opening up capacity in the US as companies are beginning to I guess reach right shore decisions. As far as the margins, you can talk.

Vincent A. Paccapaniccia

The offshore margins, we’re looking at 2008 we still project the Philippines will deliver about a mid-teens operating margin, that’s what we’ve been saying there and that’s also our 08 expectations. As we go to 2010 I think those numbers, well I’m going to talk more offshore via Philippines and Land America I think they would stay double digits which might decline a little bit, maybe be in the 12, 13% range, something along those lines. The US and Canada are the other two major factors we think will be better recovering but I’ll say low to mid-single digits.

Matthew J. McCormack – Friedman Billings Ramsey

And then in terms of currency in your 08 guidance and I know that you were just asked about those, but could you kind of walk through what you did with the fourth quarter meaning can you tell us the actual dollar or dollar hit you’re expecting in 08 from currency and the dollar benefit you’re expecting that your hedges are expected offset?

Vincent A. Paccapaniccia

You bet. So, Matt, to answer you question I’ll start with the fourth quarter. In Q4 07 as I mentioned the peso and the year-over-year was up about 15%. That had a negative impact on the company gross of $2.7 million. Our hedges covered about $1.7 million of that $2.7 million of the net impact of the Philippine on the company in Q4 was about $1 million or about $0.05 of EPS. For calendar 2008 we take our projected costs that are denominated in Philippine peso and we hedge – right now we’re pretty heavily hedged in Q1, were probably 90% hedged in the first quarter, we’re rolling out the next six quarters which would be second quarter 08 to third quarter of 09, we’re putting them in place as we speak. So we’re about 90% hedged pretty much for the first half of this year and then it starts to trail off a little bit and for full year 2008 we’re 82% hedged. So 82% of our projected Philippine denominated costs we have under contract. The rate of those contracts right now are just shy of 46, it’s 45.83. So that is the value of the four of our contracts we have on the Philippines work. 45 28 3, that’s Philippine pesos to the dollar. As Schlomo asked earlier what happens if my 39.50 goes to 38.50 or something like that then my weighted would get impacted by, it would be 18% that is unhedged.

Operator

Our next question is coming from Bob Evans of Craig-Hallum Capital.

Bob Evans - Craig-Hallum Capital

Can you talk about 2007 revenue by geography? Can we get a general sense of that? I know you had given Canada I think it was around $100 million, but just trying to get a better sense of the break out between let’s say Canada, US, offshore and international? A ballpark.

John J. Brennan

If you looked at the major segments of it at the – you’re talking about full year 07?

Bob Evans - Craig-Hallum Capital

Yeah. Whichever way you want it, if it’s easier for you to do for Q4, that’s easier.

John J. Brennan

It certainly has been – there’s a couple things happening in the international markets. One is there some currency appreciation in – well not in Latin America but in UK, Canada and Australia. I’m going to stay out of how that all breaks down, but the domestic business was $318 million, we do spoke that out for the full year and the international business was $135 million and of that $135, $85 of it was in Canada. So there’s another $50 million in UK, Australia, Mexico and Argentina for a combined $50 million so relatively small typically $10 to $20 million size businesses there. Within the US of the $318 million of revenue I don’t have a split for you but probably 60% to 65% of that was associated with work done in the US or done in North America and about 35% would have been work that was done in the Philippines. I can tell you that this year as we look for 65% of the US work to be done offshore it’ll be split about 50/50 between the US and offshore revenues. So 65% of the volume being done offshore will represent approximately 50% of revenue for the domestic market.

Bob Evans - Craig-Hallum Capital

So 50/50 in terms of how the revenue will break out for 08?

John J. Brennan

For 08 for the US piece.

Bob Evans - Craig-Hallum Capital

And would you expect the US piece as a percent of the whole, that’ll obviously be bigger in 08?

John J. Brennan

The domestic revenues which is for the US markets will represent about 63% of our total revenue in 08 and the other international markets, it’s not offshore work, but the international markets will be about 37%.

Bob Evans - Craig-Hallum Capital

And what is the call volume growth assumed for 08 for the entire company?

John J. Brennan

We’re looking at overall probably as we talked earlier of trying to be at the conservative end. I think we announced previously in the 10 to 15% range, we’re down at the lower end of that when we’re looking at $465 to $475.

Bob Evans - Craig-Hallum Capital

And then you said you had a hole, the $20 to $30 million hole just out of currency, I mean moving offshore to Philippines?

John J. Brennan

Yeah that’s not influenced by volume but we are seeing the volume down in the US financial services one it’s going to be negative volume growth there for the year-over-year basis.

Bob Evans - Craig-Hallum Capital

Because if you have a $20 to $30 million hole there but then you just added $75 to $80 million of revenue, you’re still net, net, call it $50 million plus now I realize you get some of that revenue at the end of 07 so it’s not totally incremental but where would be the other gap to kind of get to your guidance?

John J. Brennan

The gap in the domestic financial services revenue so it would be down $10 million.

Bob Evans - Craig-Hallum Capital

Given that your stock is trading 3, 3.5 times EBITDA any further consideration as it relates to buy back? I have to ask you, it’s got to be better than any acquisition you’re looking at.

John J. Brennan

Same answer.

Bob Evans - Craig-Hallum Capital

I understand, but it seems like a great value given where you’re at.

John J. Brennan

Without a doubt this whole thing certainly is 90% of the reason that we are avoiding buy backs.

Operator

(Operator Instructions) Our next question is coming from Schlomo Rosenbaum of Stifel Nicolaus.

Schlomo Rosenbaum - Stifel Nicolaus

Just wanted to follow up on the buy back question. I know that – I’m not sure that I would agree that I think that the company should buy back stock but a lot of times in companies when the stock has been hammered as much we’ll see directors who have intimate knowledge of the company repurchasing stock and I’m just wondering if that’s something that you guys talk about at your Board meetings?

John J. Brennan

That’s obviously an individual decision by directors and it is something we talk about. We have actually extended because this is such a short window here we typically, our past governance practice has been to shut down internal trading beginning on the first day of the last month of the quarter which would be Monday so we have now moved that to the middle of the months moving forward. I think there’ll be a filing to that effect that is at least we’re changing the policy. So the window will be open longer for people to do trading in ICT stock and that’ll be the same moving forward into the rest of 2008 and beyond so we are trying to create a window so that can take place if any individual director so desires.

Operator

There are no further questions at this time. I’d like to hand the floor back over to Mr. Brennan for any closing comments.

John J. Brennan

Thank you everybody and I think after a very difficult year I want to thank the management and the employees of ICT for getting us through it. I think we are the end of the tunnel. We feel very good about the prospects moving forward. We feel that we have, I’ll call it, right sized the company in the right parts of the world and we see a lot of positive outlook for growth and it’s an execution game. We still have, obviously we and the rest of the world, has the headwinds of macro economic considerations and I think the headwinds of the peso will probably be less and I think that ICT and Vince and the finance department here have been very aggressive and I’d say relatively successful compared to the market in our hedging strategy but that’s a short term solution to longer term problems. But we still that even as the changes of offshore currencies appreciating against the US dollar there still will be significant gap between the cost structure of doing work onshore versus offshore. So we think we’re well positioned. We think for the issues that we’ve seen with the financial services industry for all the negatives we’ve seen a lot of positives coming to outsourcing companies like ICT as they try to reduce their cost structures. So I’d say that we are beginning the year looking to be cautiously optimistic on improving our bottom line performance and I’d say strongly optimistic on the demand outlook for additional top line growth. Thank you very much and we look forward to talking to you. It’s only 60 days away I believe that we’ll cover our results of our first quarter and then provide guidance for the second quarter of 2008. Thank you very much.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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