PeopleSupport Inc. Q1 2008 Earnings Call Transcript

| About: PeopleSupport Inc. (PSPT)

PeopleSupport Inc. (PSPT) Q1 2008 Earnings Call May 9, 2008 7:30 AM ET

Executives

Peter Hargittay - IR

Lance Rosenzweig - Chairman and CEO

Caroline Rook - CFO

Analysts

Joseph Foresi - Janney Montgomery Scott

Cynthia Houlton - RBC Capital Markets.

Tom Smith - First Analysis

Nate Swanson - ThinkEquity

Matt McCormack - FBR Capital Markets

David Scharf - JMP Securities

Michael Perna - AAD Capital

Operator

Good day, and welcome everyone, to the PeopleSupport first quarter 2008 earnings results conference call. This call is being recorded. At this time, I would now like to turn the call over to Mr. Peter Hargittay with Investor Relations and Marketing. Please go ahead.

Peter Hargittay

Thank you and good afternoon. Welcome to PeopleSupport's first quarter 2008 earnings call. On the call today are Lance Rosenzweig, PeopleSupport's Founder, Chairman and CEO, and Caroline Rook, PeopleSupport's Chief Financial Officer.

This call is being broadcast in the Investor Relations portion of our website and a replay of this call will be available shortly. Our first quarter 2008 earnings release was issued earlier today. We will start with a brief statement on the performance of the Company during the first quarter, and then provide our outlook for the second quarter and full-year ‘08. After that, we will open up the discussion for questions and answers.

Before I hand the call over to PeopleSupport's management team, I would like to remind you that some of our comments we'll make today, maybe forward-looking statements and these must be read in conjunction with risks that the company faces. Management may make statements regarding our anticipated future financial results and our operating performance, our business, our expectations regarding our expenses, industry and competitive trends, anticipated market conditions and expansion of our service capabilities. We base these types of forward-looking statements and information on our beliefs, projections and expectations, assumptions we’ve made using currently available information. You should not rely on these statements as predictions of future events. Our actual results could differ materially from those projected due to a variety of factors, some of which cannot be predicted or quantified, or are out of PeopleSupport's control.

Risks and uncertainties that could cause our anticipated results to differ from those described in the forward-looking statements include our dependence on a limited number of clients and the potential for client losses or client declines, competitive conditions in our markets, currency exchange rate fluctuations, risks associated with our operations in the Philippines and Costa Rica, our ability to manage growth, technological changes and other risks identified from time to time in our SEC filings.

Particular attention is directed to the portions of our filed reports or statements entitled managements’ discussion and analysis of financial condition and a result of operation and risk factors. Our comments speak as of today only, and you should not rely on them as representing PeopleSupport's views in the future. We undertake no obligation to update or revise our views following future events or circumstances.

I will now turn the call over to PeopleSupport CEO, Lance Rosenzweig.

Lance Rosenzweig

Thank you, Peter, and good afternoon, everyone. Thank you for joining us today for PeopleSupport's first quarter 2008 earnings call. I would like to start by stating that I am proud of our team for delivering a solid quarter operationally. PeopleSupport delivered excellent services for our clients, and from a financial perspective, our operating margins were better than expected. Our cash generation was a record $20 million. Even if you exclude the $13 million from settling our foreign currency hedges, we generated $7 million in cash from operations. There were two sizable, below the line items in the quarter that had a negative impact on our net income. Neither of these items, however, is relevant to our ongoing operations. Caroline Rook, our CFO, will discuss this in more detail, as well as our results for the quarter and outlook, in a few moments.

In today's call, I will focus on the following themes. One, PeopleSupport's improving operational performance and our near-term plans for continued improvements. Two, our confidence in our future growth opportunities, given our service excellence, leadership position within key vertical industries and strong cash position. And three, our vision for the future, as we build a broader, stronger global outsourcing company.

Onto our first theme; PeopleSupport's improving operational performance and near-term plans for continued improvements. Throughout 2007, we took a number of important steps, including realigning our operations along industry verticals to build a more efficient operation, while continuing to deliver high performance services for our clients. We are now seeing tangible improvements in operational efficiency, asset utilization, employee productivity and client satisfaction. During the first quarter we achieved many of the goals we set for ourselves. Specifically, we improved our peak hour utilization rates in Q1 '08 to 71%, up from 64% at the end of 2007.

We exited our operations from our tertiary facility in Manila. We do not plan to use this facility for delivering future services, although we may lease out the space as our lease ends in early Q2 2009. We optimized our floor space by adding seats in our existing facilities in Manila. We exited our Newport Beach facility and transferred more transcription and captioning work offshore. We continued to deepen our industry domain knowledge and expertise. We enhanced IT and workforce management systems for improved workflow and process management. We strengthened middle management and energized a culture of accountability by launching several new six sigma programs with our clients.

Our clients are applauding our efforts and we now intend to invest additional resources to our six sigma program. And we established an ongoing program to identify and aggressively eliminate unnecessary costs.

Finally, our captive services offering, though not a major part of our business, enabled us to optimize our business model over the near-term, leading to increased revenues and improved operating margins. These actions have resulted in greater focus, improved employee productivity and most importantly, higher client satisfaction, and we are already seeing the results, with better than expected operating margins. Normalize operating margins grew to over 7% in the first quarter.

We continue to improve the utilization of our infrastructure. In Q1 of this year we added approximately 300 new production seats in our flagship PeopleSupport center in Manila, without any additional rent expense. At the same time, we exited a tertiary facility in Manila, eliminating over 800 seats. We now have approximately 7,000 production seats worldwide, and we are highly focused on driving higher seat utilization over the course of the year. As for our land in Manila, we intend to sell this land to a potential buyer in the Philippines. Our plans in Cebu remain under review.

Now our second theme; our confidence in our future growth opportunities, given our service excellence, leadership position within key vertical industries and strong cash position. I talk to clients and prospects on a regular basis and I can assure you that while driven by cost savings, both clients and prospects are seeking the best performing companies in offshore outsourcing, a flight to quality. Executives are looking to partner with offshore BPO providers that have strong balance sheets and that can weather economic challenges. Our strong cash position and our leadership position as high-quality provider, are key differentiators that give PeopleSupport a competitive advantage.

Our sales pipeline is robust, with several hundred opportunities, including approximately 50 highly qualified opportunities. We are seeing interest from new industry sectors and new geographies. Our sales team is excellent and growing, consisting of senior and highly effective sales directors and an impressive sales support staff. Since our last call, we hired a VP of Business Development, who is focused on partnerships as well as new prospects. We now have a total of 9 seasoned sales executives actively selling our services.

During the quarter we closed a large new financial services client, a Fortune 500 company that could potentially generate $5 million or more of annual revenues once fully ramped up. To address the growth opportunities that we see, PeopleSupport has several strategic initiatives in place that we believe will provide solid growth opportunities. First, we are building on our success within the financial services, travel, healthcare and insurance verticals, and we are exploring back office services we can provide for clients in these sectors.

Second, we are actively pursuing sales opportunities in Europe. Initial pipeline developments in the UK are encouraging. Third, we are also seeing interest from other parts of the world, including Australia, Asia, the Middle East and Africa, and we may dedicate more resources to these new market opportunities. And finally, Spanish language support continues to be an emerging space. We are already seeing the results of this focus.

As part of the development of our business model, we are shifting toward healthier and more stable clients, which we believe will create a stronger foundation for more consistent future growth. As our guidance indicates, we expect slower growth over the next couple of quarters, as this transition occurs.

Our tech and telecom sector is experiencing most of its slowdown, particularly due to EarthLink and Vonage. We are also seeing a slowing economy, which in the short-term may delay or stretch out the signing of new clients, but in the long-term should foster demand for offshore outsourcing. In fact, with the exception of our tech and telecom sector, our business is growing strongly. If you exclude EarthLink and Vonage, revenues in the first quarter grew 27% compared to Q1 '07, quite respectable in this weak economy.

Furthermore, we have successfully increased pricing with several of our major clients, which clearly demonstrates our service excellence and our value proposition to our clients. We are actively working on price increases with our other clients.

I would now like to talk about our existing clients. The first category of clients I will talk about are our strategic clients, those clients that represent more than $10 million in annual revenues. PeopleSupport has 4 strategic clients, which include Expedia, Washington Mutual, JPMorgan Chase and a large travel client. Revenues from these four clients collectively increased 47% year-over-year, and we expect to see solid double-digit growth from this group going forward.

Our second category of clients are those clients with revenues between $1 million and $10 million, of which we have 12 such clients. We are seeing solid growth from these clients, with the exception of EarthLink and Vonage. If you exclude these two clients, this group of clients is expected to grow significantly this year.

While I am disappointed that our business with EarthLink and Vonage is being negatively impacted, I do believe that we have an opportunity to replace this business with larger and more stable clients, which will be in the best interest of the company in the long run.

And now our third theme; our vision for the future as we build a broader, stronger, global outsourcing company. Our vision for the future is to build a high performance BPO company, offering several complimentary services, enabling us to more fully utilize our global infrastructure on a 24 by 7 basis. Our strategy is to focus on specific industry verticals and to deliver high value-added, multilingual, cost effective services from predominantly low-cost geographic locations. By doing this, we believe we will build a broader, stronger global outsourcing company.

Today we are addressing only a small segment of the total available market of the global BPO industry, which is a multibillion dollar market. This is an enormous industry. At PeopleSupport, we are focused on certain segments where we can differentiate ourselves. Today we excel at customer management, transcription and captioning services. Over time, we plan to add to these capabilities.

We are also focused on new industry verticals like healthcare and insurance. We have an excellent voice-based service for this vertical, and we may look to add back office capabilities through M&A. We continue to be interested in acquiring businesses that offer back office services that we could provide during our off-peak hours, when our utilization rates are the lowest, and we will opportunistically consider other M&A opportunities as well, to potentially supplement the solid organic growth we expect. Our strategic plan is to move beyond the Philippines and become a leader in providing services from other countries as well. We have established a strong presence in Costa Rica, and we are constantly looking at other countries for English and Spanish services.

We are more cautious about PeopleSupport's near-term revenue growth, in light of some specific technology and telecom clients we have discussed, as well as a slower economy and the potential impact of the economy on new deals being stretched out. But we remain optimistic about the medium and long-term opportunities ahead for PeopleSupport, as the trend toward outsourcing to the Philippines remains strong and our strategy of providing high value-add and cost effective services to specific vertical industries differentiates PeopleSupport as a premier provider.

I would now like to introduce our Chief Financial Officer, Caroline Rook, to go over Q1 results in more detail and to provide our outlook for Q2 '08 and the full year 2008.

Caroline Rook

Thank you, Lance, and thank you everyone for joining us today. For the first quarter '08, PeopleSupport reported revenues of $35.7 million, an increase of 6% compared to the year-ago quarter. We experienced solid performance from our top clients in the financial services, travel and consumer industries. Revenues from our top-four clients, as Lance mentioned, including Expedia, WaMu, JPMorgan Chase and a large travel client, increased 47% compared to the year-ago quarter. This increase was partially offset by a decrease in revenues in the technology and telecom sector, primarily attributable to EarthLink and Vonage, both of which were down more than previously expected and now forecast to continue to decline.

As of our last quarterly conference call, revenue from some technology and telecom clients were expected to be down $12 to $13 million in '08 compared to '07. Now, we're looking at an additional $5 to $6 million deterioration in forecasted revenues, to around $18 million decline for these technology and telecom clients, relative to '07. Additionally, we are more cautious about the near-term effect from the weak U.S. economy, which may result in somewhat lower call volumes and an associated impact on new deals currently in our pipeline. Outside of the technology and telecom sector, we are seeing solid growth from a ramp-up in both existing clients and new clients.

In the first quarter, we reclassified certain expenses from cost of revenues to SG&A, and conformed prior year amounts to the current presentation. This is a change in presentation only. Historically, PeopleSupport had classified support expenses incurred in the Philippines and Costa Rica to cost of revenues, as these operations were small and without significant administrative support functions. As PeopleSupport expanded, our foreign operations have become more involved in corporate G&A, as our global support organization has expanded offshore for greater economies. As PeopleSupport realigned its operations into industry specific organizations in '07, the support function organizations were also aligned and clarified.

Gross cost of revenue at 67% as well as SG&A at 23% as a percentage of revenues, were fairly consistent between Q1 '08 and Q1 '07, despite an appreciation in the Philippine peso, which reduced operating income by approximately 8% compared to the same period prior year. Operating income for the first quarter was $0.9 million, an improvement over the expected loss of $0.6 million for the quarter. We had a favorable adjustment of $0.6 million to our paid time off reserve, saw some up-tick as the peso depreciated to the U.S. dollar, and enjoyed some efficiencies in operations.

This compared to Q1 '07 operating income of $1.1 million and Q4 '07 operating income of $0.2 million.

First quarter '08 operating margins were 2.5% as compared to 3.2% in the year-ago quarter. On average, for the first quarter of '08, the Philippine peso appreciated 16% against the U.S. dollar, compared to a year ago, reducing PeopleSupport's first quarter '08 operating income by $2.9 million and operating margins by 8.1%, compared to the first quarter of '07. If the Philippine peso rate was the same as one year ago, PeopleSupport's operating margins in the first quarter '08, would have been 11%, versus 3% in the first quarter of '07.

Non-cash stock-based compensation expense was $1.7 million in the first quarter, compared to $1.2 million in the year-ago quarter. This expense further reduced operating margins by 4.7% in the first quarter of '08, and 3.4% in the first quarter of '07. Depreciation and amortization remained essentially flat, at roughly 7% of revenues.

First quarter EBITDA, an important non-GAAP operating metric for PeopleSupport, was $5.2 million, or roughly 15% of revenues, compared to $4.7 million or 14% of revenues in the year-ago quarter, despite the significant depreciation of the Philippine peso. In an effort to minimize the volatility from foreign currency movements, we adopted a new foreign currency hedging program during the quarter that may provide better matching of the expense and the associated potential gain or loss from the hedges. And we adopted this new program in Q2 '08.

In connection with this new program, we settled our previous outstanding Philippine peso forward contracts by the end of March, resulting in an additional pretax cash of approximately $13.1 million and a first quarter book loss of approximately $5.9 million, when compared to Q4 '07, previously booked mark to market unrealized gain of approximately $19 million.

Since establishing the Philippine peso foreign currency program a year ago, we have generated nearly $18 million in pretax cash gains from this program. Additionally, we booked a non-cash tax expense of $17.6 million, related to the establishment of an income tax valuation allowance against our net federal deferred tax asset, since based on current facts and circumstances, the asset may not be realized.

These two items impacted Q1 '08 net income by a negative $23.5 million or $1.09 per diluted share. Including this negative impact, net income in Q1 '08 was a loss of $21.8 million, or a negative $1.01 per diluted share, as compared to a gain of $3.9 million or $0.16 per diluted share in Q1 '07.

PeopleSupport generated significant cash during the first quarter. Net cash provided from operating activities was $20 million and free cash flow was $19 million. Approximately $13 million was the result of our foreign currency forward contracts that we settled in the quarter.

DSOs were a healthy 40 days at the end of the third quarter. As of March 31st, '08, cash and cash equivalents in marketable securities totaled around $138 million, including $15 million in option rate securities, which as you know, are currently illiquid in the market and have been reclassified accordingly into long-term assets.

As part of our second $25 million stock repurchase program initiated in the quarter, we repurchased 370,000 shares of common stock through open market purchases, at an aggregate cost of $3.3 million in the first quarter. Our repurchase program will impact our financial statements throughout 2008, as we use our cash to repurchase shares, which will potentially reduce interest income and our share count and potentially affect our EPS.

Approximately $7 million purchase cost was moved from property and equipment to recurring assets under land held for resale, as we are exploring a potential sale of our land in Manila. CapEx was $1.4 million in the first quarter, compared to $14 million in Q1 '07 and $1.6 million in Q4 '07. As a reminder, CapEx in Q1 '07 included approximately $9 million for land purchased in Manila and Cebu in that period. We generally expect CapEx to be around $5 million for the year, assuming we do not build-out any more new production seats.

Next, I will make a few comments about our operations. During the quarter, PeopleSupport continued to make progress, streamlining existing operations and gaining efficiencies from our existing capacity. PeopleSupport exited a tertiary facility in Manila, with approximately 800 seats, and added approximately 300 seats in our existing PeopleSupport center in Manila. At around the end of Q1 '08, we now have a total of approximately 7,000 production seats worldwide excluding the tertiary facility we consolidated operations from in Manila.

When we look at the reduced production seats our utilization rate increases to 71%, up from 64% in the fourth quarter '07. We continue to focus on optimizing our operations and utilization rates. Headcount was reduced slightly, by 300, and we ended the first quarter with approximately 8,300 employees worldwide, with 7,900 employees in the Philippines. Attrition was 8% in the first quarter as compared to 6% in the year-ago quarter. I'll goal is to at least maintain our attrition in the mid-20s for the year, similar to our historical attrition levels.

And now for guidance, which is based on the following. One, including the impact of our effective hedge, our forecast from Q2 for the remainder of the year is assumed at 42 Philippine pesos to the U.S. dollar. Two, no impact from the stock repurchase program is included in our guidance, but the forecast of course includes the $3.3 million worth of shares we've already acquired in the first quarter.

With that, for the second quarter '08, we expect revenues to be between $37.2 and $38.2 million. Operating income is expected to be 1.5 to 2.5%. Non-cash FAS 123R expense to be approximately $1.6 million. Tax charge of around 5%, assuming no discreet items. Diluted EPS to be $0.06 to $0.08 based on an average of 22.1 million shares on a diluted basis.

For the fiscal year 2008, we now expect revenues for the year to be between $153 and $157 million. Operational income margins are expected to be maintained from prior forecasts, despite slower revenues, and these being at between 3 to 4%. Non-cash FAS 123R expense to be approximately $6.5 million, down $1.3 million from previous guidance.

From Q2 '08, an effective tax rate of 5%, excluding any discreet items, such as in the event we sell our land in the Philippines. Diluted EPS to be a negative $0.74 to a negative $0.65, with a loss contributed by the Q1 results. EPS is based on an average of 21.6 million shares on a diluted basis.

With that, let me turn the call back to Lance.

Lance Rosenzweig

Thank you, Caroline. In summary, PeopleSupport is delivering excellent results for our clients. I am pleased with what our team has accomplished in the past year in this regard. We have implemented a number of actions to improve our operating margins and we are beginning to see the benefits of these actions. Our growth is being impacted by current general market conditions and decreased revenues from the telecom and technology sector.

Our other industry verticals are growing nicely. We have seen price increases, we are signing stronger and healthier clients, we are entering new industries and new geographies, and we believe we are building a solid foundation for strong growth. We are focused on executing and we are confident that this strategy will drive long-term shareholder value.

Thank you for listening, and we will now turn the call over to the operator for the Q-and-A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

Hello. My first question here is just on the guidance side. This is sort of the third revision downward. And I was wondering if you could give us some insight into how you go about setting those guidance expectations and maybe what happened this quarter that surprised you?

Lance Rosenzweig

Sure, Joe, this quarter we really saw two factors that happened that we were not expecting. First, is the tech and telecom sector, particularly EarthLink and Vonage, where we saw, and again, most significantly EarthLink, a significant further reduction in their business. EarthLink I think in its earnings call a couple of weeks ago, announced it was reducing its marketing and sales expenditures by around 70%, and that's most of the business that we did for EarthLink. And so we're seeing a significant decline there. And that sector has just been generally slow for us.

And secondly, we're seeing greater impact from the slowing economy, both on call volumes kind of across industries, and also on some delays in signing of new clients. But that said, if you take out those two clients, we are seeing very strong growth from our existing client base and also strong growth in new client signings.

In terms of the other part of your question I think was on how we develop our forecast and how we guide, and we take the information that we have at the time, we look at all existing clients and we build a bottoms-up forecast with those existing clients. We look at new prospects and where they are in the sales pipeline and what's signed or what's in legal, etcetera, and we assign probabilities and timetables based on those clients, and based on that we guide.

Joseph Foresi - Janney Montgomery Scott

So it's safe to say that when you gave the prior guidance, your probabilities on EarthLink and Vonage have significantly changed?

Lance Rosenzweig

Correct.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just, you've talked about and maybe you can help us reconcile this. You talk about a very strong demand backdrop, yet guidance has come down a couple of different times, and it looks like you're making the business more efficient by reducing the seat count and even reducing the headcount. In addition to that, you're using the service offering to fill some seats that maybe perhaps you're not using. Help us kind of reconcile your sort of bullish stance on the pipeline and what potentially is out there versus what looks like a move towards efficiency and maybe getting rid of some excess capacity?

Lance Rosenzweig

So, I think there really are two separate elements of that. First is on growth and second is on operating efficiency. And in terms of growth, even if you look at the low end of our forecast for this year, we're still forecasting and expecting 23% revenue growth from last year, again, excluding EarthLink and Vonage. So we are seeing solid growth from existing clients. We are seeing good new closes. We closed 1 new Fortune 500 company we're expecting to be north of $5 million revenues this quarter, and the pipeline is still very, very strong.

Unfortunately, we are seeing a lot of slowdown from these other two and other tech and telecom clients that we have to fill that gap before that impact starts actually driving stronger growth.

In terms of operating efficiencies, we have been operating for several quarters now at too much excess capacity in the Philippines. And we're making decisions to drive a more effective and more efficiently run business. And part of that is about the facility, which is our highest cost facility, our least efficient operation, and we decided to exit it. And we think there are opportunities actually to monetize that through either captive services or sublease opportunities, but we didn't want to carry that as an inefficient operation. Instead, we took our most efficient operation in Manila, our PeopleSupport center, and we expanded it by reconfiguring seats within the center, so we can again operate more effectively and efficiently.

Joseph Foresi - Janney Montgomery Scott

And just two more quick ones. On the captive services side, how much did that contribute to revenue and what impact did it have on utilization?

Lance Rosenzweig

We don't break out captive services as a specific segment, but it would be consistent with prior quarters.

Joseph Foresi - Janney Montgomery Scott

And you expect that to expand? Are you selling that as an offering now?

Lance Rosenzweig

We are selling this offering. We are not expecting significant expansion in our forecasts.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just lastly here, Caroline, you talked about some of the one-time items, I assume that the 13 million and the 17.6 million are one-time. I wonder, is the 0.6 million that you mentioned as a paid time off charge, I wonder if you could just explain that and maybe give us a full rundown of what you considered to be the one-time charges in the quarter? Thank you.

Caroline Rook

Primarily, the largest one-time charge would be the 0.6 million in the quarter. We do an annual review, and basically we reconciled that, as per usual, on an annual basis. And when we trued that up, it was 0.6 million. But basically the rest of it was in Q1, was the currency, the peso depreciated against the U.S. dollar and also more operational efficiencies. The taxes and the sale, as well as the realization of the existing hedges in the quarter, contributed the below the line charges.

Joseph Foresi - Janney Montgomery Scott

Okay, but the 0.6 million was a one-time as well?

Caroline Rook

Yes. We do an annual appraisal every year, but I just wanted to highlight in Q1, that impact.

Joseph Foresi - Janney Montgomery Scott

Okay, thank you.

Lance Rosenzweig

Thank you.

Operator

We will move now to Cynthia Houlton from RBC Capital Markets.

Cynthia Houlton - RBC Capital Markets

Could you just quantify your large customers in terms of percentage of total? I don't think we got that yet. And just Expedia, EarthLink, Washington Mutual, JPMorgan Chase. Vonage, I assume there's pretty little left. And then the travel company as a percentage of total, could we get all those numbers?

Lance Rosenzweig

Sure. Hang on one sec, Cynthia, we're just pulling it up. Cynthia, we have the numbers and we're just going to calculate it as a percentage, so we'll come back to that toward the end of the Q&A.

Cynthia Houlton - RBC Capital Markets

Okay. Then as a follow-up question, in terms of your discussion on the volume declines and slowness in the economy, and then issues from EarthLink and Vonage offset by new customer wins, I guess one thing that seems a little strange is that we're just not hearing that from some of the comps or the peers, that they are seeing material volume declines. Are you seeing it besides EarthLink and Vonage? I mean, have you started to see it in Expedia? Where else are you seeing actual volume declines at clients? And again, is that because you have such a large share with those clients and you're actually seeing the volume trends, or are clients moving business in-house instead of using you? Could you just give a little bit more detail on that?

Lance Rosenzweig

Sure. If we look at our larger clients, our top four strategic clients, and even the large group below them, outside of the two that I mentioned, we're seeing actually some nice growth from those companies. When we talk about slowdowns in call volumes, we're not talking about relative to absolute numbers in the past, we're talking relative to expectations going forward. In some of these segments and clients, they're experiencing lower volumes than they expected to realize in some of the segments that we're handling. So in the travel industry, for example, there is a softness in the U.S. travel and a strength in international travel. And PeopleSupport is handling the U.S. travel, so we're impacted, as an example.

Cynthia Houlton - RBC Capital Markets

Okay, so you did see softer call volumes at Expedia? I mean, what?

Lance Rosenzweig

No, what I'm saying is Expedia represented, I have the numbers here. Expedia represented 22% of revenues in the quarter. WaMu 17%. JPMorgan Chase 14%. And the large travel client 9%. And all of those were up sequentially from prior quarter.

Cynthia Houlton - RBC Capital Markets

And then what was EarthLink and Vonage? I mean, obviously EarthLink was less than 10, but just to give us a feel for where we're at so we know how much more risk or decline we could see?

Lance Rosenzweig

EarthLink down significantly year-over-year and Vonage as well. And we'll get you those number momentarily.

Caroline Rook

EarthLink was less than 7% of revenue.

Cynthia Houlton - RBC Capital Markets

For Earthlink?

Caroline Rook

Yeah. And Vonage was less than 2% of revenue.

Cynthia Houlton - RBC Capital Markets

Okay. And then finally, in terms of utilization, I just want to make sure I got the numbers. This quarter you had 71% utilization, is that correct, Caroline?

Caroline Rook

Correct, if we exclude the tertiary facility we exited from.

Cynthia Houlton - RBC Capital Markets

Okay. And then what is kind of the comfortable range of utilization before you start spending on adding seat count? And is that something that's planned for this year or is it more a plan for, now, next year?

Lance Rosenzweig

It's a little dependent on the geographical location. If there's demand in a specific location where we're out of capacity, then we would have to build out that capacity, even if there was availability in another location. And the only place where we're potentially seeing that now is in Baguio, where we are seeing very, very strong demand from some of our newer clients.

However, we are not on our current revenue forecast, expecting to add additional capacity this year. So we do expect to grow into our capacity. We'll see higher seat utilization going forward, and then we'll expand that capacity just in advance of demand for that capacity. So we could be up in the 80% range before we're looking at expansions.

Cynthia Houlton - RBC Capital Markets

Thank you.

Lance Rosenzweig

Thank you.

Operator

Tom Smith from First Analysis has our next question.

Tom Smith - First Analysis

Hi, guys. Thanks for taking my question. I had a question on the new financial services client that you signed. Can you comment on the ramp period that you expect from that client?

Lance Rosenzweig

Yes. Typically we see clients ramp over the course of about a year, and then subsequent ramps would be depending on new business that's won with that client. This is actually a fairly rapid ramp and it's one that is going into our new Baguio facility. So we're excited about the company and we think that they're a great opportunity, both for the piece of business that we closed, and for additional lines of business going forward.

Tom Smith - First Analysis

Okay. And I think earlier you had talked about kind of seeking out stronger clients with more stable backgrounds. Can you comment on what types of clients you're seeking? Is it any vertical in particular?

Lance Rosenzweig

Yes, absolutely. If you look at what's been happening in our client base, some of the weaker companies that we've mentioned are shrinking, yet the new closes are Fortune 500 companies, such as the financial services company we closed in the quarter. Prior closes, if you look back the past few quarters, are increasingly large Fortune 500 companies. They're financial service vertical, healthcare and insurance vertical and travel vertical are particularly strong.

Tom Smith - First Analysis

Okay, great. Then I was just wondering, is there any chance that you could reclassify the rest of 2007 numbers, so we'd have some comparison going forward?

Caroline Rook

Yes. Basically, let me just grab that. I think it was around 2 million slip from cost of sales and SG&A every quarter. And it's about 8 million for the year. Let me just pull that up for you.

Lance Rosenzweig

You want to ask one more question, Tom, while she adjusts with that?

Tom Smith - First Analysis

Oh yes, sure. So, are you looking to hedge any additional facilities going forward or are you pretty comfortable right at 7,000 seats?

Lance Rosenzweig

Our current seat count, we're comfortable, based on the forecast that we have for the remainder of the year. If we were to win business that's outside that range, or if business is disproportionate in one location, then we could look at additional capacity. But we're not expecting to need that capacity this year.

Caroline Rook

Okay, so for '07, the slip, we moved expenses from cost of sales to SG&A. Q1, 1.7; Q2, 1.8; Q3, 1.9; Q4, 2.7; 8.1 for the year.

Tom Smith - First Analysis

Great. Thanks a lot.

Lance Rosenzweig

Thank you.

Operator

We will move on to Nate Swanson with ThinkEquity.

Nate Swanson - ThinkEquity

Hi. Going back to your comments about upgrading your customer base, I was wondering, Lance, if you looked at all of your revenues, what percentage of your revenues would you say are at risk of being in that bucket of lower quality or lower stability revenues?

Lance Rosenzweig

Well, really the two clients where we're seeing that continued volume decline, were EarthLink and Vonage, and we gave their percentages. Otherwise, I think as we look at our top dozen clients, we're not seeing that kind of softness right now.

Nate Swanson - ThinkEquity

Okay, so that's just EarthLink and Vonage that you're speaking to right now. That does not include shutting down other clients who maybe are smaller or would fall into that same sort of financial lack of stability?

Lance Rosenzweig

Now, sometimes it's hard to tell, right, because things happen at companies that we're not privy to. But overall, what we're hearing and what we're seeing from our client base makes us quite confident in the strength of our core clients.

Nate Swanson - ThinkEquity

Okay. And then going back to the pipeline and I know you're up in terms of number of sales execs. I wondering how quickly do you expect those sales execs to ramp and what kind of visibility do you have in the 50 deals that you have in the pipeline?

Lance Rosenzweig

We're seeing pretty consistent results in terms of the sales cycle, and we're not really seeing lengthening or contracting of that cycle. Companies, I think there's a greater urgency to save money and to move business offshore, but they're being thorough and they're being prudent in their due diligence and they're going through their process.

I think that the strength of our pipeline is probably consistent, if you look at it back over the past quarter or so, and increasing amounts are coming from some of the new sales directors. So some of them are being productive pretty quickly and getting good new prospects into that pipeline. But again, once in the pipeline, they do need to go through their cycle.

Nate Swanson - ThinkEquity

Okay. I mean, in terms of maturity of the pipeline, I know in Q4 you had a couple of pilot contracts that ended up not flowing through, that ended up going to more global players. How do you feel about pilot contracts that you have today or potential pilots in the pipeline at this point?

Lance Rosenzweig

We've not seen that subsequent to those two clients, and the newer clients that we've closed are all growing very nicely.

Nate Swanson - ThinkEquity

Okay. And then last question. In terms of your future vision of being a full BPO and also going global, your thoughts on how you would do that organically versus M&A opportunities?

Lance Rosenzweig

We've been a predominantly organically growing company and I don't envision that changing. We are looking at M&A opportunities, particularly in back office areas, and that tend to be focused in the healthcare and insurance sector. But that would be to broaden our service offering, so that we could go to the larger clients in that industry and offer greater suites of services, very complimentary lines of business.

But I don't see us becoming a rollup company or that sort of thing. I think acquisitions could be very important and strategic to us. But I think we'll continue to see strong organic growth as a great underpinning of the company.

Nate Swanson - ThinkEquity

Okay, all right. Thank you.

Lance Rosenzweig

Thank you.

Operator

Next we will hear from Matt McCormack with FBR Capital Markets.

Matt McCormack - FBR Capital Markets

Yeah, hi. Good evening. The first question on the new financial services clients, could you comment on the sales cycles for that client specifically, had that been delayed?

Lance Rosenzweig

Sure, Matt. It was probably consistent with the other clients that we've had in that sector, so generally 9-12 months sales cycle. Some of them even a little bit shorter. Some of the larger companies that we've closed in the past; WaMu, JPMorgan Chase, for example, were unusually long sales cycles, so this was probably shorter than we've seen from the larger clients in that sector.

Matt McCormack - FBR Capital Markets

So it's about 9 to 12 months?

Lance Rosenzweig

Yes, roughly speaking, that's about what we're seeing in most of our major new closes.

Matt McCormack - FBR Capital Markets

So, in terms of your commentary about the sales cycle extending, so you're seeing decisions take longer than a year now?

Lance Rosenzweig

No, not really. I think we're seeing consistency in that overall sales cycle, but what we're not seeing is we're not seeing an acceleration. We're not seeing companies say okay, we have to go offshore right now, let's make rash decisions. We're seeing companies beat the road, make the right decision and pick the strongest partners.

Matt McCormack - FBR Capital Markets

Okay. In terms of the transcription services, I don't think we've actually heard you speak about that for a while. Could you give us an update on what that is as a percentage of revenue and kind of what that's been growing at?

Lance Rosenzweig

Yes. It's not broken out as a sector, so it's less than 10% of revenues. But it's a business that has been increasingly profitable, that we've been moving and migrating a good number of that business to the Philippines operations, which is performing extremely well for those services. We think we've got some strong clients there and some good opportunities in the future.

Matt McCormack - FBR Capital Markets

Are you maintaining the same pricing? You said I guess you closed your Newport Beach facility, but are you maintaining the same pricing as you move that work offshore?

Lance Rosenzweig

We are. And that's what's driving the higher margins.

Matt McCormack - FBR Capital Markets

Okay. And then just a last question. Can you give us an update on the Costa Rican operations?

Lance Rosenzweig

Yes. Costa Rican operation continues to perform extremely well, very, very high quality operations, leaders in SLA performance, quality, et cetera. It's not a growing center right now. It's been pretty stable in size, some quarters a little up or a little down, depending on kind of short-term conditions, but it's a great solid contributor for us. As we've mentioned in the past, our clients there, Washington Mutual, has had an option to acquire that facility. There hasn't been any change in that option.

Matt McCormack - FBR Capital Markets

Okay, great. Thank you.

Lance Rosenzweig

Thank you.

Operator

Next we will go to David Scharf with JMP Securities.

David Scharf - JMP Securities

Well, yeah. Good afternoon. A few things, Lance. One, I realize it's only the first quarter of '08. I don't want to jump too far ahead into next year, but trying to get an understanding of the trajectory and kind of maturation process of some of the bigger clients. You've been highlighting the growth rate excluding a couple of outliers. But in particular, I'm trying to understand kind of how the company, what the growth profile looks like in '09, depending on how these big four perform.

And it looks like, and I'm just multiplying the percentages as you give every earnings call, times the total revenue to come up with the revenue per client. It looks like WaMu has been flat for three quarters in a row, 5.9, 6.1, 6.1 million, and Expedia has had nice year-over-year growth, but for the last three quarters it was 8.5, then 7.2, now 7.8, and the travel client as well, it looks like it's been sequentially flat for about five quarters in a row. Is it fair to say that these three clients have kind of reached a maturity level and are probably going to be at this kind of run rate going into next year, or is there a pipeline of new projects that could materially raise their growth rates beyond that?

Lance Rosenzweig

Right. Why don't I start, David, by saying that we're trying really hard to get '08 right, so we're not really thinking too much about '09, in terms of.

David Scharf - JMP Securities

No, I agree. I'm just trying to get a sense if 60% of your revenue base is kind of going to be flattish next year or if we should think of these big four as still sizable double-digit growers?

Lance Rosenzweig

Right. So, our belief is that as we look at those top four clients, that the current business that we've been doing with those companies is pretty stable and is kind of growing modestly. But, there are new lines of business that we're winning and that we expect to win in the future, with some of those companies. So we think that some of them, even if they've had some sequential flatness in prior quarters, we think that they do have growth opportunities. And some of them, you know, particularly the larger companies, are very large, we're still handling a very small percentage of their overall business, if you look at a JPMC or a WaMu. And they do have some very strong outsourcing growth opportunities going forward.

David Scharf - JMP Securities

Okay, got you. Just following up on the sales cycle question, just curious, is the extension of the sales cycle, in your mind, do you think it's 100% related to macro pressures right now, cyclical factors, or do you think there's some competitive issues as well? I mean, you can't read any trade rags any day without seeing another new center being opened up in the Philippines. It's just been explosive growth still. Are more parties making the short list on all these RFPs, is that perhaps a factor?

Lance Rosenzweig

We think that we remain a real leader in the Philippines and that the Philippines itself remains an excellent location, probably the best location for voice-based services. And so, we're very comfortable with our position there and with our management team there, with our assets and our infrastructure, our client reference, etc. So we think we're very well positioned. And we do distinguish ourselves as a quality premier provider, so we are not the low-priced competitor in our deals. And the deals that we're losing, we're losing primarily on price.

But it is a competitive environment. You know, there are a lot of, the major call center companies, most of them have operations in the Philippines. A lot of the Indian competitors are establishing operations there. And we haven't seen a lot of small new ones starting, but you know, substantial companies are growing there. But we think we've got a very competitive offering. We're adding a lot of value to our companies. We're increasingly looking to partner with some of the large global players that we hadn't in the past. And I think in this kind of weaker economy, where Fortune 500 companies do quite a bit of diligence on their perspective partners, having the strong balance sheet that we have is also a great differentiator.

Operator

(Operator Instructions) We will go now to Michael Perna with AAD Capital.

Michael Perna - AAD Capital

Hi, lance. Thanks for taking my question. Just a few questions on the real estate strategy, please. Can you give us a best estimate of the apples to apples utilization rate, considering the facility that you've consolidated? And then, maybe if you could speak about the ongoing savings from the consolidation versus the cost to move?

Lance Rosenzweig

Sure, Mike. Let me ask Caroline to address those numbers.

Caroline Rook

So, if we included the tertiary facility, which we're not using for operations, I think we'd be fairly flat with Q4, you know, probably in that same 63-64% range. And what was your second question?

Michael Perna - AAD Capital

The ongoing cost savings versus the cost to consolidate?

Caroline Rook

Well, you know, we still have that lease until early Q2 '09, so we're still paying facility rental charges. What we would be saving would be some minor charges, which would be more of the utility aspect, the cleaning, and the security aspects.

Michael Perna - AAD Capital

Okay. And you discussed that you're still in the process of selling the land in Manila, etcetera. Can you maybe give us a best estimate as to when the real estate monetization would be complete?

Lance Rosenzweig

We would hope that it will be closed probably in Q3.

Michael Perna - AAD Capital

Okay. And it said in your press release that you used approximately $3 million on stock repurchases as of March 31. If you can maybe give us an update as to how much you've bought back since then, and maybe the game plan for how we should think about the stock buyback throughout the year?

Lance Rosenzweig

Sure. We're just looking it up now.

Caroline Rook

I think to-date, we're nearly at the $10 million mark, probably at the same buyback price.

Michael Perna - AAD Capital

Okay. And I'm sorry, on that, the real estate monetization, how much is the anticipated gain from that?

Lance Rosenzweig

We talked last quarter about an aggregate amount of pre-tax cash between the real estate and exiting the hedge, of around $25 million and we don't want to be too specific about it, given the negotiations we're having with our perspective buyer, but it's not too far off from that original forecast.

Michael Perna - AAD Capital

Okay. And is there anything to be concerned about, about the 15 million in auction rate preferreds?

Caroline Rook

Well, as concerned as everybody else in the market holding it.

Lance Rosenzweig

But you know what, generally if you look at those instruments, it's among the higher quality of the option rate preferred instruments; AAA-rated, government backed, etcetera. And so we are reclassing it from short-term to long-term assets, but we're seeing nothing that would expect that there'd be any kind of impairment on the actual realizability of those assets.

Caroline Rook

And we'll see what the market does in the future. But there's been no impairments to date.

Michael Perna - AAD Capital

Okay. And two more questions please. How much of your revenue, if you could quantify it, is on a fixed revenue basis versus call volume? And I guess what I'm trying to figure out is how much of the revenue decline would come from just decreased call volumes, or potentially losing market share?

Lance Rosenzweig

You know, the vast majority of our business right now is priced on an hourly basis, so it's based on the people who are answering the calls, rather than the number of calls that come in. However, they are directly related. When a company's call volume goes down, they would have fewer staffing or when it goes up, they would request more staffing. So, in the long-run they're highly correlated.

Michael Perna - AAD Capital

Okay. And last question, please. Just a lot of above the line, below the line adjustments. What is the best way to think about, with all the moves you made to improve the profitability of the company, what is the best way to think about the long-term, pro forma gross margin, operating margin for the company?

Lance Rosenzweig

Sure, and Caroline will address that, Mike, but we are also looking internally at EBITDA margins, which is a clean way of looking at operating performance, without a lot of the below the line adjustments. And that's been quite consistently strong. But Caroline, maybe give some perspective?

Caroline Rook

I'll say that the biggest impact to us over the last several years has been the peso. As you can tell, 8 percentage points between Q1 '07 and Q1 '08, is fairly large. I think that our goal with the pesos constant is to be back with operational efficiencies and economies of scale on an adjusted operating margin basis, to be fairly consistent. We've always said in the double-digit, maybe low-teens arena. I think that the fall, the appreciation and the peso against the U.S. dollar, it's somewhat long-term for us. So I don't think we'd get back to the 55-56 rate. So that's a permanent diminution.

Michael Perna - AAD Capital

Okay. Thank you very much.

Lance Rosenzweig

Thank you.

Operator

We will take a follow-up question from David Scharf.

David Scharf - JMP Securities

Sorry, I got cut off there. I was wondering how we ought to think about the seat capacity for the remainder of the year? Should we just be looking at higher utilization or will you be growing materially beyond 7,000 seats, given your forecasted pipeline and whatever is being ramped up?

Lance Rosenzweig

So, given our current forecast, David, we believe we can handle that capacity at that revenue base at our existing capacity. As we start getting towards the end of the year, and particularly if we see strong demand in Baguio, then we might look at some capacity expansion there. And we have the facility in Baguio that can handle that capacity, so it's really just building out additional seats within that facility.

David Scharf - JMP Securities

Got you. And last question, I know you don't like to address a lot of strategic balance sheet issues on these calls, but clearly the company looks materially overcapitalized for its expansion plans, even if you move into new geographies. The share repurchase is a start, but has there been any thought by the Board or consideration of a material one-time dividend, special dividend?

Lance Rosenzweig

Well, we're on our second $25 million stock buyback now. We keep buying back stock and our cash keeps going up, because of our very, very strong cash generating within the company. And as the Board on a regular basis, looks and evaluates the balance sheet and the income statement and makes decisions over time. So we have nothing particular to comment about now, in terms of future use of cash, but we are happy with our current buyback program and expect that to continue.

David Scharf - JMP Securities

Okay, thank you

Lance Rosenzweig

Thank you.

Operator

And there are no other questions at this time. Mr. Rosenzweig, I'll turn the conference back to you for closing remarks.

Lance Rosenzweig

Okay, thank you very much, everyone, for listening and we look forward to reporting on Q2 numbers next quarter. Thank you very much.

Operator

Again, that does conclude our conference. We do thank you for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!