Headquartered in Los Angeles, PeopleSupport (PSPT) is a leading provider of offshore business process outsourcing (BPO) services for U.S.-based clients from its facilities in the Philippines. The company provides customer management, accounts receivable management, and BPO services in a variety of industries, including travel and hospitality, technology, telecom, retail, consumer products, and financial services. The company's 7,800 college-educated, English-speaking, Philippine-based representatives manage millions of customer communications each month via the phone, email and Internet. The company has also expanded into accounts receivable management services. The company's three largest clients, Expedia, EarthLink, and ConsumerInfo.com, accounted for 45% of 2006 revenue. PeopleSupport was founded in 1998 and went public in October 2004. In November 2006, a secondary public offering of 4,830,000 shares was priced at $20.00 per share. Credit Suisse Securities and Cowen and Company were the joint managers of the offering with JMP Securities and Piper Jaffray acting as co-managers.
PeopleSupport continues to benefit from the robust growth of the offshore BPO services market and its strong position in the attractive human capital market of the Philippines. According to the Gartner Group, a leading provider of research and analysis on the global information technology industry, the worldwide offshore BPO industry is expected to grow from $6 billion in 2005 to $43 billion by 2009, representing a compounded annual growth rate of 61%. The company has significant competitive advantages given its established position in the Philippines, which is increasingly recognized as one of the preeminent locations for customer-facing, voice-based outsourcing services. The company's strong reputation in the country will allow it to continue to attract the most talented individuals, which should further enhance the company's long-term client value and profitability. Notably, the company has traditionally focused on quality rather than being the low-cost provider of BPO services, which has enabled the company to maintain premium pricing relative to peers in an extremely competitive market environment.
Management's top-priority is to broaden the company's BPO service offerings, pursue new industry verticals, and continue geographical expansion. Although a new people support center in the Philippines and an expansion into Costa Rica will continue to negatively impact costs over the near term, the expanded capacity has long-term potential. The new facility in the Philippines is the first built-to-suit' world-class outsourcing facility in the country and expands the company's capacity by 1,800 seats. The new facility in San Jose, Costa Rica will support up to 500 seats, approximately 70% of which are expected to be filled by a new Fortune 500 clients. In 2006, the company signed agreements with six large clients in the Fortune 500, of which four are expected to generate annual revenue of at least $5 million and the other two are expected to generate approximately $1 million in annual revenues. The company served approximately 38 customer management clients in 2006, of which six generated more than $5 million in annual revenue. Including both new and existing facilities, production seat capacity was increased by more than 73% worldwide to 5,600 production seats at the end of 2006. Management has increased the number of production seats to 7,700 through the third quarter of 2007. In addition, PeopleSupport's geographic expansion into Costa Rica strengthens the company's Spanish and bi-lingual language capabilities. As the company adds new clients and leverages existing client relationships to utilize the increased capacity, the company should experience meaningful margin expansion and lower customer concentration risk. The company's three largest clients accounted for 45% of total revenues in 2006, down from 59% in 2005.
By investing in additional production capacity, management expects to increase the company's market share in the rapidly growing offshore BPO market. The company has purchased land for expansion and management has plans to build the company's own facilities. Over the long term, the decision will not only aid PeopleSupport in mitigating increased rent costs, but also should benefit the company as real estate values increase. The company purchased land in Manila and Cebu for $7 million and $2 million, respectively, on which production facilities will be constructed. Management estimates construction costs to be in the range of $40 million to $50 million, with the facilities becoming fully operational in 2009. The company will capitalize the construction costs and amortize them once the facilities are completed. Management expects the new facility in Manila to be PeopleSupport's largest operational hub with 5,000 production seats. Nearly 4,000 production seats are planned in the Cebu facility. The company's production capacity should double when the two facilities are fully staffed.
Management seeks to expand strategically through mergers and acquisitions, which also will help diversify the company's client base. PeopleSupport recently acquired Rapidtext, Inc. and its subsidiary, The Transcription Company, which provides transcription and captioning services. Apart from enabling the company to enter into new BPO markets, the acquisition diversifies the company's offerings with specialized voice-to-text services. The Rapidtext operations are profitable and were accretive to 2006 earnings. Management is seeking acquisition target that will expand and complement the company's BPO services, transcriptions and captioning, and customer management operations.
The company's margin is being negatively impacted by currency translations. In 2006, the operating margin contracted 452 bps to 10.7%, in part due to a strong Philippine peso against the U.S. dollar, along with the investment in production capacity in the Philippines and Costa Rica and integration costs associated with the acquisition of the transcription and captioning business. As a result of the appreciating Philippine peso against the dollar in 2006, management adopted a hedging program, in which the company is including a clause on contract renewals that factors costs associated with negative currency movements. Therefore, nearly 80% of currency risk is hedged through mid-2009.
Finally, the company maintains a sound balance sheet with minimal long-term debt. In addition, cash and marketable securities were $140.5 million versus $51.6 million in 2006. The higher cash balance is attributable to the company's secondary public offering of 4,200,000 shares at $20 per share in November 2006. Cash flow from operations increased to $22.2 million versus $16.7 million in 2005. Lastly, in August 2007, the Board of Directors authorized a $25 million stock repurchase program, which was completed in the third quarter on 2007.