eTelecare Global Solutions, Inc. Q2 2008 Earnings Call Transcript

| About: eTelecare Global (ETEL)

eTelecare Global Solutions, Inc. (ETEL) Q2 2008 Earnings Call Transcript August 13, 2008 5:00 PM ET

Executives

Anh Huynh - Director of IR

John Harris - President and CEO

Mike Dodson - SVP and CFO

Analysts

Dave Koning - Robert W. Baird

Joseph Foresi - Janney Montgomery Scott

Josh Vogel - Sidoti & Company

Tom Smith - First Analysis

Operator

Good afternoon. My name is Quinn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the eTelecare Second Quarter 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer period. (Operator Instructions).

At this time, I would like to turn the call over to Anh Huynh. Please go ahead.

Anh Huynh

Thank you, Quinn, and good afternoon. My name is Anh Huynh, Director of Investor Relations for eTelecare Global Solutions. I’d like to welcome to eTelecare second quarter 2008 financial results conference call. With me today are John Harris, our President and Chief Executive Officer, and Mike Dodson, our Chief Financial Officer.

The press release and financial tables associated with today’s conference call were distributed today. If you do not have a copy, you may find them on to company’s website at www.etelecare.com. This call is being broadcast live through the Internet and maybe accessed through the Investor Relations section of eTelecare’s website.

Before management begins the discussion of the second quarter results, I’d like to remind you that this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes statements that relate to future events and included but are not limited to statements related to our expected revenue, net income, capital expenditure, expected tax rate for the fiscal year and third quarter of 2008, the anticipated impact to our business of our recent acquisitions or anticipated [necessary] relocations, high demand for our services, client programs and the type services we deliver, anticipated expenses, statements relating to our sales pipeline, projected levels of activities and renewals with our current customer, as well as statements relating to our business strategies.

Any forward-looking statements made during this call are subject to risks and uncertainties that can cause actual results to differ materially from those projected. Any additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commissions on May 14th, 2008, and supplemented by report of Form 10-Q filed on August 13th, 2008. These forward-looking statements are current as of today’s date.

eTelecare undertakes no obligation to publicly update any forward-looking statements for any reason except as required by law even if new information becomes available or other events occur in the future.

I’ll now turn the call over to eTelecare’s President and Chief Executive Officer, John Harris.

John Harris

Thank you, Anh, and good afternoon everyone, and thank you for joining us today, and welcome to our second quarter 2008 earnings call. I’m pleased to announce that for the second quarter of 2008 eTelecare achieved a record $75 million in quarterly revenue, which was above guidance, a 23% increase over second quarter 2007 revenue of $61 million.

The execution of our overall business strategy is enabling us to gain new customers, and our performance with our current customers is enabling us to gain market share within our customer base as they drive volume to the top performers.

Current indications are that 2008 revenue will be in the range of $300 million to $310 million and in line with our original guidance, representing a growth of 15% to 19% over 2007 revenue of $260 million.

The company recorded second quarter 2008 net income of $600,000; $0.6 million or $0.02 per diluted share, which includes a $1.2 million one-time expense for professional fees associated with the due diligence regarding an acquisition that we elected not to pursue. Excluding this one-time expense of $1.2 million or $0.04, earnings would have been in lined with the mid-point of our second quarter EPS guidance of $0.06.

As the BPO market continues to evolve, I am confident that our strategies are focusing on the more complex type of [trust] interactions, delivering quantifiable value to our clients, and continuing to invest in our differentiated performance in our people processes and technologies. And a continuing evolution of our multi-shore delivery capability will continue to drive our aggressive growth plans into 2009 and beyond.

As I have stated in previous calls, we have made our priority in 2008 to expand our geographic delivery platform. I am pleased to report that we have notable progress in implementing this component of our strategy. eTelecare announced earlier today that the company is establishing a new delivery center in Nicaragua. In addition to entering Central America, we have recently increased our North American capacity to the opening of Jacksonville, Texas delivery center as well as launching eTelecare’s at-home service. I’d like to provide additional details in each of these expansion initiatives.

Earlier today, eTelecare announced that it will expand in Latin America by establishing a new delivery center located in Managua, Nicaragua. With full deployed facility we’re employing over 500 peoples delivering Spanish and bilingual customer care, sales and technical sport services in our Fortune 500 client base.

Delivery center in Nicaragua will complement our service delivered from our U.S. and Philippine delivery centers by providing the capabilities to address the need for bilingual voice services in North America as well as providing a near-shore english voice delivery capability to our clients.

Nicaragua was the logical choice for a number of reasons, not least as position as one of the safest and most stable democracies in Central America, it has a robust economy, a state-of-the-art telecom infrastructure with plenty of available capacity. And unlike its neighbors, it is not been saturated with BPO providers. Accordingly provides eTelecare with an opportunity to tap into a [globally] young and motivated work force within a contact center job is viewed as a genuine vocational opportunity.

Finally, it shares a time zone with the United States and will enable us to address a growing demand for bilingual services in North America. And in addition to entering to Central America, we last month increased our North American capacity through the opening of our Jacksonville, Texas delivery centre which is our seventh in the United States.

We have already begun ramping our customer care program at this facility and we currently have approximately one-third of our total capacity in production. We anticipate that delivery centre full deployed by the first half of 2009, at which time we expect to employ over 400 people in Jacksonville.

And also as announced on our last earnings call, eTelecare is launching at-home service as it needs to further expand our delivery capability in North America. The ramp to support a new customer care program is currently on schedule, and we are targeting approximately 100 at-home bases by year-end, and we anticipate continued growth in this delivery option as we move forward into 2009.

We are building a world-class management team. And I am pleased to announce that on June 2nd, Lewis Moorehead joined eTelecare’s executive team as the company’s Corporate Controller and Chief Accounting Officer. In this role, Lewis provides financial analysis and assessments to assist senior management and evaluating the financial position of the company and the financial implications of critical business decisions.

Prior to eTelecare, Lewis was a partner at Rivers & Moorehead and served as the Chief Financial Officer, Secretary Treasurer of Intelligentias. His experience also includes serving as the Vice President and Controller of American Express as a Senior Manager for Price Waterhouse Coopers.

Now, this concludes my opening remarks. And as we noted in today’s release it’s now anticipated the second half earnings will be higher than the first half of the year but below earlier expectations. Michael will discuss in his remarks the reasons for the lower bottom-line guidance.

So, I will now turn the call over to Mike Dodson, our Chief Financial Officer to review our financial results in more detail. And once Mike completes the financial review, I will conclude the call with updates and [declines] in our sales pipeline.

Mike Dodson

Thank you, John. I now would like to discuss in more detail our financial results for the second quarter and our financial guidance outlook for remainder of the year. For the second quarter of 2008 we reported record revenue of $75 million, a 23% increase from the same quarter year ago. As John has previously noted, this performance was ahead of our revenue guidance for the quarter at $72 million to $74 million.

Sprint and our non-top five clients continue to be drivers of our strong year-over-year growth. Non-top five customers contributed to our top-line growth by recording a 39% increase in revenues year-over-year.

On a sequential basis our revenues for the second quarter increased 3% over the prior quarter. Due to seasonality, the second quarter has been the slowest period of the year for the company as evidenced by a sequential decline in the consolidated revenues in two of the past four years at a modest 3% sequential growth in the two years the revenues did not decline.

Our delivery centers in the Philippines recorded quarterly revenue of 46 million, representing a 27% year-over-year growth. During the second quarter, revenue generated by the Philippines delivery centers represented 61% of the consolidated revenue, higher when compared to 59% in the same quarter a year ago, but lower than 65% of consolidated revenues reported in the previous quarter.

On a sequential basis, comparing the second quarter to the first quarter of 2008 revenue delivered from our Philippine delivery centers is down slightly. This slight decrease was driven by the previously discussed seasonal declines we experienced in the second quarter that were only partially offset by the growth and other Philippine programs during the quarter. For example, we experienced seasonal declines in programs of Intuit and Dell. Our delivery centers in the U.S. recorded quarterly revenue of $29 million representing 16% growth year-over-year. During the second quarter, revenue generated by the U.S. delivery centers represent at 39% of our consolidated revenue. Lower when compared to 41% in the same quarter a year ago but higher than the 35% of consolidated revenues reported in the previous quarter.

On a sequential basis comparing the second quarter to the first quarter of 2008, revenue delivered from our U.S. delivery centers increased 13%. Similar to the consolidated revenues, this increase was driven by growth in Sprint and non-top five clients. For example approximately one-third of our sequential growth in the U.S. was due to growth of our non-top five clients.

Now I would like to touch upon our client revenue mix. Given the company’s history of serving Fortune 500 companies the client mix has been weighted towards larger accounts. Our Fortune 500 clients represented approximately 81% of our consolidated revenues in the second quarter of 2008 compared to 77% in the previous quarter. We also report revenues for the top five customers and in the current quarter they represented 82% of our consolidated revenues compared to 81% in the prior quarter.

On an individual basis, we have historically discussed clients with more than 10% of consolidated revenue which for the second quarter included AT&T, Sprint, and Dell representing 27%, 22%, and 19% of our consolidated revenues compared to 25%, 20%, and 19% in the prior quarter, respectively.

John will provide a detail discussion of our significant clients later in the call. The revenue spilt for the quarter by vertical markets has remained relatively unchanged since the last quarter. The communication sector which includes cable, internet, and telecommunications continues to represent approximately two thirds of our revenue. The technology sector represents approximately one quarter of our revenue and financial services represent approximately 5% of our revenue.

Now I would like to discuss the comparison of the profitability between the current quarter and the same period of the prior year. For the second quarter of the current year we reported operating income slightly less than $1 million or 1% of revenues compared to $7 million or 11% of revenues for the same period of prior year. Comprising this 10 margin point decline in our operating margins is a 6 margin point increase in the cost of services. A two margin point increase in selling and administrative expenses and a two margin point increase in depreciation and amortization. The primary factor increased in the cost of services was the strengthening peso compared to the U.S. dollar.

Our average exchange rate of 47.4 in the second quarter of the prior year to an average exchange rate of 42.5 during the second quarter of the current year. This strengthen of the exchange rate represented an increase and cost of services between these two periods our five margin points on a consolidated basis. The additional one margin point increase of cost of services is primarily due to higher global information technology infrastructure and Philippine site costs. These higher infrastructure cost are partially offset by slightly better mix of revenues represented by a higher mix of floating revenues in the second quarter of the current year as 61% of total revenues compared to 59% of total revenues in the second quarter of the prior year.

Selling and administrative costs in the second quarter of the current year as a percentage of revenue were two margin point higher in the same period of the prior year primarily due to two factors. First there was $1.2 million of one time expenses for professional fees associated with due diligence related to a potential business acquisition that we decided not to pursue to conclusion. Second, there were higher cost associated with enhancing our management team and infrastructure cost associated with running a publicly traded company in the United States and the Philippines.

We also continue to incur certain one-time cost during the quarter in conjunction with the company’s efforts to become Sarbanes-Oxley compliant. These public company cost were much higher in the second quarter -- were much lower in the second quarter of the prior year as we were still in the midst of completing IPO process. For the second quarter deprecation, amortization costs as a percentage of revenue was 8% compared to 6% in the same quarter a year ago. This increase was primarily due to continued investment to support our revenue growth that included site expansions in the U.S. and Philippines as well as upgrade and expansion of our global information technology infrastructure.

ETelecare’s effective tax rate for the second quarter was 31% compared to 7% for the same period of the prior year. This increase in the effective tax rate was primarily due to a decline in the Philippine profitability year-over-year. The decline in Philippine profitability due primarily to higher cost in 2008 driven by stronger peso versus the U.S. dollar, create a lower mix of profits subject to the Philippine tax holidays and a higher mix of profits subject to the U.S., Federal, and State taxes. We estimate our full-year 2008 annual effective tax rate will be 12% which assumes certain discreet tax adjustments in the extension of certain Philippine income tax holidays that expired in the second half of 2008.

In the event, we did not realize the discreet tax adjustments or paying the extensions of certain Philippine tax holidays. And our 2008 annual effective tax rate could be approximately 8 percentage points higher.

For the second quarter, we recorded $0.02 per diluted share, a $30.1 million weighted average shares outstanding. When you take into account the one time cost associated with the due-diligence regarding an acquisition that we elected not to pursue, we would have recorded $0.06 per diluted share for the quarter. Its EPS is consistent with the street expectations for the quarter.

Now, I would like to discuss our balance sheet and other operating metrics. In general, we have a very strong balance sheet. At the end of the second quarter, we have $56 million in working capital that included $34 million in cash, no debt, and stockholder’s equity of $129 million.

Our credit and other receivable balance increased by $7.9 million to $56.6 million at the end of the quarter over $48.7 million at the end of the prior quarter. Our DSO for the quarter came in slightly higher than our prior quarter at 66 days compared to 60 days at the end of the prior quarter.

Our trade receivable balance and DSOs increased primarily due to a large customer payment that was received a few days after the end of the second quarter. At this time, what have been received by quarter end, our DSOs would have been consistent with the prior quarter.

During the second quarter, we incurred capital expenditures of approximately 7 million or 9% of revenue, which was primarily used to fund site expansion and investment in our global telecommunication and network infrastructure. For the year, we expect approximately $30 million to $32 million in capital expenditures to support our top line growth and continued investment in our global technology infrastructure.

The company’s headcount at the end of the second quarter was approximately 13,100 employees comprised of 10,200 in the Philippines and 2900 in the U.S. This represents an increase of approximately 100 employees in the U.S. and a decrease of 400 employees in the Philippines. This quarter-over-quarter change in headcount gets co-related with our revenue trend over the same period.

At the end of the second quarter, eTelecare production seat count was 10,500 comprised of 7800 production seats in the Philippines and 2700 production seats in the U.S.

For the remainder of the year, we expect to have 400 production seats in the Philippines, 300 production seats in Jacksonville, Texas and 200 seats in Nicaragua. Seat utilization for the second quarter was the low-to-mid 90 percentage points.

As mentioned in our prior earnings call and disclosed in our SEC filings, our results from operations and cash flows are subject to fluctuations due to changes in the Philippines peso to U.S. dollar exchange rates.

In the second quarter of 2008, approximately 52% of our cost of services and selling and administrative expenses were generated and filled in the Philippines of which substantially all were paid in Philippine pesos.

As discussed in our last quarter call we have hedged 90% of the forecasted 2008 peso-denominated expenses. Therefore, our 2008 forecasted expenses in the Philippines are not materially affected by short-term swings in the exchange rate.

Our peso-denominated expenses incurred after 2008, we have resumed our standardized rolling and layering hedge program, which hedges approximately 80% of expenses one quarter out, 60% of expenses two quarters out, 40% of expenses in three quarter out, and 20% of expenses four quarters out.

As of the quarter-end, approximately 40% and 20% of our first quarter and second quarter of 2009 forecasted peso-expenses, respectively, have been hedged.

I now would like to provide guidance for 2008 and for the third quarter of 2008.

As John has already mentioned and will discuss further in a moment, the company continues to experience strong demand for our services. We believe the differentiating factor that has allowed us to continue to grow our business and look optimistically beyond 2008 its continued execution of our strategy, to revive [quite a final] value to our clients.

With that said, we are reaffirming our 2008 revenue-guidance for the expectation of 2008 revenue will be in the range of $300 million to $310 million. Our 2008 revenue guidance positions detail up there to achieve 17% annual growth over 2007 revenue, when applied in the midpoint of our revenue guidance.

eTelecare has historically experienced stronger revenue growth in the back-half of the year compared to the first half of the year and subsequently we are expecting sequential quarterly growth in the third and fourth quarter of this year. For the third quarter of 2008 eTelecare expects third quarter revenue will be in the range of $75 million to $80 million.

Despite the strong revenue on the top line, our forecasted margins for the back half of 2008 are expected to be higher than the first half but lower than previously anticipated due to a number of factors.

First, although our demand for services is strong, the geographic distribution of that demand is weighted towards the U.S. The short-term trend is driving their revenue mix that is putting pressure on our gross margins for the remainder of the year. The same trend will result in higher site cost in the Philippines as we will not be absorbing certain fixed cost due to the shift in revenue mix.

Second, in response the client demands, we have opened the new site and initiated an at home service offering in the U.S. also as announced this morning we are opening a new site in Latin America. As a result of meeting these client demands, we will be incurring certain one-time ramp up and carrying cost to bring the new service offering and new sites online during the back half of the year.

And third, we continue to pursue initiatives to enhance our operating efficiencies in the areas of workforce planning and scheduling, Asian productivity have support ratios. We expect to begin to realize benefits from these initiatives in the back half of the year, so we also believe we will experience a greater benefit in the first half of 2009 as these programs reach operational maturity.

As a result, and given the one-time $1.2 million expense in the second quarter, we are reducing our guidance regarding 2008 earnings. Whereas eTelecare had previously projected that net income in 2008 will be in the range of $16 million to $19 million or 50% to 60% per diluted share. We now project that the net income will be in the range of $9 million to $11 million or $0.30 to $0.36 per diluted share. For the third quarter of 2008 eTelecare expects third quarter net income will be in the range of $2.5 million to $3.5 million or $0.08 to $0.12 per diluted share.

As we look beyond 2008 we believe our sales pipeline or support annual revenue growth at the same or a slightly better growth rate that we expect in 2008. We also believe working in our favor beyond 2008 will be a shift back to more favorable geographic revenue mix. With a shift in revenue mix comes at better absorption of fixed cost in the Philippines. We also expect to realize measurable benefits for our operating initiatives. In addition based on the current strength of the U.S. we would anticipate measurable benefits to our financial operating performance beyond 2008.

I would now like to turn the call back to John.

John Harris

Thank you, Mike. I would like now to provide a business update related to a few of our largest clients. In the second quarter AT&T accounted for 27% of our revenue compared to 25% in the prior quarter, representing a $2 million increase in revenue quarter-over-quarter. Although, AT&T volumes historically have been flat between the first and the second quarter, AT&T revenue came in slightly higher than our expectations for the second quarter of 2008. We expect AT&T revenue to slightly increase during the third quarter. Our largest client -- our second largest client Sprint represented 20% of our revenue at the second quarter compared to 20% in the prior quarter. As mentioned in our last earnings call Sprint has become one of our key drivers of growth in 2008.

During the second quarter, Sprint revenue increased 12% by reporting a $2 million increase in revenue quarter-over-quarter. We expect Sprint revenue to increase during the third quarter.

The second quarter Dell represented 19% of our revenue, unchanged from 19% in the prior quarter. As discussed in our last earnings call, Dell volumes came in as expected with revenues flat for the quarter.

For the third quarter of 2008, we expect Dell revenue to be in line with second quarter revenue. Our positive revenue outlook for 2008 and beyond is supported by a strong pipeline as evidenced by the strength of our closing activities since our last earnings call, when we reported three programs in the pending stage. Since then, we have signed contracts for ten programs and currently has seven new programs in the pending stage. As a remainder only programs for which we are finalizing contracts are characterized as pending.

And not only that eTelecare demonstrates strength in wining new programs since our last earnings call, but our sales activity also shows our commitment to further diversifying our client mix. I am pleased to announce that since our last earnings call, we have added four new clients to our customer base. Notably, we have been chosen by Fortune 25 computer companies and a large global security technology company to provide in-balance sale services.

In addition, we continue to grow with our existing clients by winning new programs across customer care, sales, and technology service delivery lines. I would like to highlight the two of the programs with an existing client for financial services protocol. In addition, our recent program wins are also with existing clients in the communications and technology vertical segments.

Despite the weakness in the economy, we continue to see good growth opportunities within the mix of markets that we are focused on, specifically communications, hi-tech and financial services.

Our sales pipeline is in the historical height and it will position us to continue our growth for 2009. As stated earlier, eTelecare will continue to execute against the strategy by focusing on the more complex into the voice market, delivering quantifiable values through outstanding performance through expanding our geographic delivery footprint and judiciously adding non-voice services to our operating portfolio to increase asset utilization and to serve our clients for the broader set of services.

This concludes our prepared remarks, and we’ll now open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we go first to Dave Koning with Robert W. Baird.

Dave Koning - Robert W. Baird

Hi, guys.

John Harris

Hi, Dave. How are you doing?

Dave Koning - Robert W. Baird

Good, thanks. First of all, I am just wondering with the guidance introduction for the full year and for -- really for the quarter as well, Q2 coming in below what you expected, did you know half way through Q2 when you gave guidance that, that you were looking at this other business, I guess I am just wondering if that was incremental spend relative to when you said Q2 guidance not for ‘08 some of the growth initiatives, if that is our incremental spend relative to what you assigned in mid-May?

Mike Dodson

Yeah, Dave. I will take that, when we gave our guidance for the quarter we very well could have been in the middle of doing the due-diligence, but the assumption is as it going through something like that especially as far down the path as we got, that those cost would be capitalized as part of the deal and you wouldn’t see come to your income statement. So because we didn’t conclude on the deal that came through a superior costs and we didn’t anticipate that and we didn’t -- that’s why I didn’t include in our guidance when we gave for the quarter.

Dave Koning - Robert W. Baird

Okay, okay, I appreciate that, that makes a lot of sense. Secondly, the Philippines I guess I was a little surprise that the shift away from a Philippines in towards the U.S. especially given a weaker economy I would think that a lot of your clients would really push for the lower cost options. I am just wondering kind of what you are seeing there if that sustain in the Q3 that there is just a shift away from the Philippines?

John Harris

No, they are just charters and a long-term shift away from the Philippines I think this is just a point in time issue just based on how our client demands were coming in. We have a couple of clients who specially want U.S. delivery because some premium problems they were taking out to the market and it just caused that shift long-term to see the trend very much still continuing to move towards offshore delivery. And if you look at our sales pipeline the majority of the pipeline today is for Philippine delivery or Latin American delivery.

Dave Koning - Robert W. Baird

Okay, that’s great. And then finally when we look at the back half it looks like you are guiding the operating margin in the back half of the year in the ballpark of 5% or so. When we look at ‘09 is it fair to think that the margins can be even better than that given? Is the peso alone the way we calculated it could be couple hundred basis point benefit to ‘09 margin just given right now we are at 44, 45 and you are probably going to pay 42 or so for ‘08. I am just wondering how to think about kind of margins in the back half of ‘08 and then as we go into ‘09?

John Harris

I think its fair to say that the combination of a more favorable exchange rate the blend of business to 20 U.S. and Philippines returning to the percentages that we enjoyed in the past, and the impact of operational efficiency program that we are putting in place plus the elimination of some of the one-time cost that we’ve incurred in 2008. I think you would see some very favorable margins in 2009.

Dave Koning - Robert W. Baird

Okay. Is there anyone to quantify maybe the impact of the peso and some one-time items as we kind of bridge from ‘08 to ‘09?

Mike Dodson

Well, we haven’t provided guidance for ‘09. We definitely, as John has outlined, there are certain areas that we do believe are going to enjoy benefit. When you look at the back half of the year and the operating margins, as you have already calculated in the 5% basis, we would expect to be north of that by a fair amount next year.

Dave Koning - Robert W. Baird

Okay. That’s great. I appreciate it.

Operator

We’ll go next to Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

Good evening. Just first on the acquisition, can you give us some color as to perhaps where you’re looking to bolster your capabilities and you’re looking at and why you sit backed away from the deal?

John Harris

Yes. So, Joseph, it was an acquisition opportunity in Europe, specifically in the United Kingdom. And the reason we backed away from the deal was we did not come to final terms of payment structure.

Joseph Foresi - Janney Montgomery Scott

Payment structure. So, it seems like the moments lately into Nicaragua back to U.S. and obviously the acquisition in the U.K. have all been away from the base in the Philippines. I am wondering if you can talk a little bit about at the beginning of the year, obviously, the tone was more pro the Philippines. What has changed in the environment that has sort of moving you guys away from that base right now?

John Harris

Well, I’d say two major points. One is we don’t see this as move away from the Philippines. The Philippine still represents the best offshore voice delivery location in the market today. But we also think it’s important to diversify our delivery footprint, because we are getting demands from our customers to serve them in multiple geographies around the world. As you serve multinational companies like the like [MDs] for his biggest panic, the bilingual capabilities are in North America, they have needs to serve in Europe and ultimately they are going to needs to be served in Asia.

So, this is really more of an execution of our stated strategy which is to continue to evolve our multi-shore delivery capability. It’s not a diminishing of the importance of the Philippines, but it’s a recognition that the clients that we serve have more needs than just be served in North America and the Philippines.

Joseph Foresi - Janney Montgomery Scott

Okay. Can you guys just clarify, I am not sure if I got this correct in the press release. But are there still build-out costs associated with the Philippines that were unexpected?

Mike Dodson

No, the reference in the press release is talking about the absorption of site costs, because we have got more – our mix is more towards the U.S. than we had previously anticipated. We are not absorbing as much of the fixed cost with Philippine revenue. So therefore, it hurts our margins.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just lastly, obviously, we have seen some stuff out in the current environment as far as volume is decreasing. What have you seen on your client base, both the present one and the potential new clients that leads you guys to believe that things have changed? Are we seeing any changes there?

John Harris

Well, I can’t speak for what others are seeing in the market, but specifically in our case, with particular clients that we are serving, we are seeing pretty stable volume requirements. We are also better also benefiting just based on our performance from people pushing volume our way as oppose to perhaps some other providers. So, there is some better consolidation going on within the client base. Obviously, with the economic trends that we are seeing, I think all customers are facing some pressures. But to-date, I think primarily based on our performance and as you can tell by our revenue guidance, we’re doing very well.

Joseph Foresi - Janney Montgomery Scott

What would be the chief reason for the consolidation? Is it pricing or can you maybe give just little more color? Thanks.

Mike Dodson

I think it’s more a matter of people who are planning and managing a vendor network, let’s say, 25 to 25 vendors is just a lot of management overhead, and they are trying to narrow it down to say to top 10 or 11 top performers that they want to continue to do business with. And then they allocate volume to those vendors based on their performance.

Joseph Foresi - Janney Montgomery Scott

Thank you.

John Harris

Thanks, Joe.

Operator

We’ll go next to Josh Vogel with Sidoti & Company.

Josh Vogel - Sidoti & Company

Hi, there. Thank you.

John Harris

Hi, Josh.

Mike Dodson

Hi, Josh.

Josh Vogel - Sidoti & Company

I just wanted to maybe get a better sense of the scale of the 10 programs that you won last quarter. Once fully ramped, could you maybe quantify for us how much you think those can contribute to the top line?

John Harris

No, we won’t provide that type pf data at this point, Josh.

Josh Vogel - Sidoti & Company

Okay. Now, we’ve seen a lot commentary out of competitors across the industry, and I was wondering what your take was on the rapid wage inflation we are seeing as well as longer program ramp periods?

John Harris

In terms of wage inflation, are they speaking of Philippines or U.S.?

Josh Vogel - Sidoti & Company

Globally, basically both.

John Harris

I am not sure we’re seeing a rapid wage inflation anywhere within our labor force. I mean, you have got normal inflation that’s occurring I think in both marketplaces. But so far, it seems to be well within our parameters that handled on the ramps. I think that just depends on the size of programs that people are undertaking and perhaps their success in reaching into the labor pool and bring in the agents on board in a timely manner.

So far I think we have been very successful in meeting the ramp requirements for our customers. So, that has a really been an impact for us this year.

Josh Vogel - Sidoti & Company

Okay. Now you mentioned that revenue from AT&T was a little bit greater than what you thought it would be. With the shift back to the U.S. and the build out in Texas, is this mostly to handle volume for Cingular?

Mike Dodson

It’s really a mix of programs. We have some new clients who want a delivery out of the U.S. and then we also have some current clients who wanted to expand some programs. And we shifted some workloads around between our centers and that also drove the opening of Jacksonville facility.

John Harris

Sequentially, in the U.S. one third of our growth was non-top five clients.

Josh Vogel - Sidoti & Company

Okay. You gave us a blended utilization number, but I think you said it was in the low to mid 90% range?

Mike Dodson

Yes.

Josh Vogel - Sidoti & Company

What was it in the U.S.?

Mike Dodson

Josh, we don’t provide the geographics within that information.

Josh Vogel - Sidoti & Company

Okay. Just a couple of quick ones, please. Of the built out in Nicaragua, how much demand is already in place?

John Harris

Our pipeline is pretty well represented. Within the pipeline, it’s pretty represented by companies would have the bilingual requirement. So, I would expect that we will be drilling that up probably the first half of 2009. We think there is a very good demand there, and some market that we haven’t – has been untapped by us after this point in time.

Josh Vogel - Sidoti & Company

Okay, great. And you mentioned that the acquisition that fell through would have been in the U.K. Is it fair to assume that this is a next market you are targeting after Nicaragua and would acquisition still be the likely method to achieve this expansion?

John Harris

Yes, I think as I have stated in the past on past earning calls that we wanted to continue to expand our region to other english voice markets, which would include, obviously the United Kingdom, Australia, New Zealand. And my preferred entry is through acquisition if can find one at the right price that’s accretive and fits into our strategic plan.

Josh Vogel - Sidoti & Company

Okay, great. And just lastly, do you have an idea what the share count will be in Q3 and for full year ‘08?

Mike Dodson

I think if you would take our current share count, it may be bumping up, may be a 100,000 each quarter would be fine.

Josh Vogel - Sidoti & Company

Okay. And what was it in Q2, do you say 30.1?

Mike Dodson

Yes, 30.1.

Josh Vogel - Sidoti & Company

Okay, great. Thank you very much.

Mike Dodson

Okay.

Operator

(Operator Instructions). We’ll go next to Tom Smith with First Analysis.

Tom Smith - First Analysis

Yes.

Mike Dodson

Hi, Tom.

Tom Smith - First Analysis

[I’m sorry], what the cost were?

John Harris

Tom, I am sorry. You broke up a little bit there. Could you repeat the question?

Tom Smith - First Analysis

Yes, sorry about that. I was just wondering if you could break out the cost for some of the investments you made in the current quarter, and also for SOX. On the last call, you had mentioned may be a $1 million in expenses that get shifted to Q2. I am just trying to figure out what a run rate should be going forward with some of these items?

Mike Dodson

Yes, when you look at, for example, SG&A, in the current quarter we had certain discretionary savings that we made in the current quarter, because if you back up the $1.2 million, it’s well below over our rate in Q1, even after you back out 500,000 in one-times in Q1. But we look going forward in Q3 and Q4 to support our revenue ramps during that period. We would expect SG&A expenses to return more to the organic level of Q1, which is in the neighborhood of $11 million a quarter.

Tom Smith - First Analysis

Okay, in SG&A for Q3.

Mike Dodson

Yes.

Tom Smith - First Analysis

Okay. And then I guess and maybe this relates to your pipeline, and I am just trying to figure out this temporary shift where you’ve had some clients from back to the U.S. how does that not hurt your margins longer term?

John Harris

Well, I think we stated that in short-term it does hurt our margins. But as we look forward into 2009 and the percentage of the pipeline that requires building delivery or for example Central America delivery versus U.S. the higher percentage of growth is going to come from offshore again, which will take the margins back up to where they were in the past.

Tom Smith - First Analysis

Okay. I guess, so do you anticipate the deals also you have in your pipeline then been like larger, ultimately been greater magnitude than some of the current opportunities have now, is that also shift?

John Harris

The shift will be that the overall magnitude of the deals in the pipeline and the fact that the majority of the new business we think in 2009 will be delivered offshore versus onshore.

Tom Smith - First Analysis

Okay.

John Harris

Just the ratio changes pretty dramatically as we look forward.

Tom Smith - First Analysis

Okay. And then on the tax rate guidance, is there anyway you can handicap, if I get about a $0.03 difference whether you come up with a 12% for the full year or I think you have said 20% for the full year, you won’t get certain holidays?

Mike Dodson

Yes. I mean I would for modeling purposes we believe that 12% is a good rate. If things happen differently than how we believe today, it could be as high as the 20%. But I would say for modeling purposes 12% is a good rate.

Tom Smith - First Analysis

Okay. And then just on the entrance to the Nicaragua that you have talked about today. Are there any reasons you decided to go with a joint venture there? I mean, it just struck me it’s been odd given it’s only have a hundred seats. I just wondered was there anything behind that?

John Harris

Well, here was an opportunities to gain a piece of real estate that was very attractive to us and shortcut the process of entering into the bilingual market here in North America. As we think we save probably a year by entering into a joint venture, which is primarily around the real estate component. And by the way it calls for us to built buy-out of it that in the five years. So, we don’t this is an ongoing joint venture as much as a point time joint venture that allowed us to get into the market quicker, and also allowed us to leverage some human resource and other resources from our partner that will allow us to penetrate the labor market much more quicker. So, overall we were managed to doing this.

Tom Smith - First Analysis

Sorry. So, your partner has the facility there already and you are helping to build it out, and that’s why it’s –?

John Harris

That’s correct.

Tom Smith - First Analysis

Okay, great. Thanks guys.

Operator

And that concludes our question-and-answer session and today’s conference call. Thank you for your participation. You may now disconnect.

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