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PeopleSupport 10-Q 2007 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission File Number:
333-115328
1100 Glendon Ave., Suite 1250, Los Angeles, California
90024
(Address of principal executive
offices)
(310) 824-6200
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (check one).
Large
accelerated o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The number of shares of the registrant’s common stock
outstanding as of May 7, 2007 was 23,557,687 shares.
PEOPLESUPPORT,
INC.
FORM 10-Q FOR THE QUARTER ENDED March 31, 2007
Table of Contents
PART I —
FINANCIAL INFORMATION
PEOPLESUPPORT,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
PEOPLESUPPORT,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
The accompanying notes are an integral part of these
consolidated financial statements.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
PeopleSupport, Inc. was incorporated in the state of Delaware on
July 2, 1998 and is a leading offshore business process
outsourcing (BPO) provider that offers customer management,
transcription and captioning and additional BPO services from
its centers in the Philippines, Costa Rica and the United
States. PeopleSupport’s services are designed to reduce
costs, improve performance and increase revenues by delivering
high quality, value-added, multilingual voice and text services.
A majority of PeopleSupport’s services are performed in the
Philippines, where we believe PeopleSupport is one of the
largest outsourcing companies, employing more than 8,500
college-educated, fluent English speaking personnel.
Headquartered in Los Angeles, California, with more than 9,200
employees worldwide, PeopleSupport serves clients in a variety
of industries, such as travel and hospitality, financial
services, technology, telecommunications, consumer products,
healthcare and insurance, law enforcement, entertainment and
education.
In this report, all references to “us,”
“we,” “our” and “our Company”
refer to PeopleSupport, Inc. and its subsidiaries.
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the
opinion of management, all adjustments considered necessary for
a fair presentation (consisting of normal recurring accruals)
have been included. The information at March 31, 2007, and
for the three months ended March 31, 2007 and 2006, is
unaudited. The balance sheet data at December 31, 2006 is
derived from the audited consolidated financial statements for
the year ended December 31, 2006 but does not include all
disclosures required by accounting principles generally accepted
in the United States. Operating results for the three months
ended March 31, 2007 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2007. For further information, refer to the
consolidated financial statements and footnotes thereto for the
year ended December 31, 2006 included in the Company’s
Annual Report on
Form 10-K.
Certain reclassifications have been made to prior year amounts
to conform with the current presentation.
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period.
Significant estimates include valuation reserves for accounts
receivable, income taxes, and valuation of marketable securities
and goodwill and recoverability of long-term assets. Actual
results could differ from those estimates.
Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash
equivalents and accounts receivable. Cash and cash equivalents
are deposited or managed by major financial institutions and at
times are in excess of FDIC insurance limits.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
The Company performs ongoing credit evaluations of its
customers’ financial conditions and limits the amount of
credit extended when deemed necessary. The Company maintains an
allowance for potential credit losses and write-offs of accounts
receivable, which amounted to $1,485 and $947 at March 31,
2007 and December 31, 2006, respectively. This allowance is
our best estimate of the amount of probable credit losses in our
existing accounts receivable balance based on our historical
experience, in addition to any credit matters we are aware of
with specific customers. The allowance is reviewed monthly to
ensure that there is a sufficient reserve to cover any potential
write-offs. Account balances are charged off against the
allowance when it is probable the receivable will not be
collected.
Our revenue is concentrated among a small number of clients.
Please see Note 3.
We recently purchased forward foreign currency contracts between
the Philippine peso and U.S. dollar. Changes in the value
Philippine peso to U.S. dollar exchange rate could have a
significant impact on our financial statements. Please see
Note 9 for additional information.
Implementation fees include revenues associated with new
customers that are deferred and recognized ratably over the life
of the contract. Session fees, including revenues associated
with voice, email and live help transactions and with hosting
and maintaining software applications for customer service, are
recognized as these services are provided. Revenues are
recognized when there are no significant Company obligations
remaining, fees are fixed and determinable and collection of the
related receivable is reasonably assured.
Cost of revenues consists primarily of employee-related costs
associated with the services rendered on behalf of a client, as
well as telecommunications costs, information technology costs
associated with providing services and facilities support
related to the operation of outsourcing and data centers and
consulting services.
Long-lived assets, including fixed assets and intangibles, are
reviewed for impairment annually. An undiscounted cash flow
analysis is utilized to determine whether impairment has
occurred. If impairment is determined, the asset is written down
to its estimated fair value. The estimation of future cash flows
and fair values involves considerable management judgment. This
analysis is performed in the fourth quarter of each year unless
indicators of impairment become evident at an earlier date.
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142) requires that goodwill and other
indefinite-lived intangible assets be tested for impairment on
an annual basis. In assessing the recoverability of goodwill and
other indefinite-lived intangible assets, market values and
projections regarding estimated future cash flows and other
factors are used to determine the fair value of the respective
assets. If these estimates or related projections change in the
future, we may be required to record impairment charges for
these assets.
To determine the fair value, we generally use a present value
technique (discounted cash flow). The factor most sensitive to
change with respect to our discounted cash flow analyses is the
estimated future cash flows of such goodwill and other
indefinite-lived assets each reporting unit which is, in turn,
sensitive to our estimates of future revenue growth and margins
for these businesses. If actual revenue growth
and/or
margins are lower than our expectations, the impairment test
results could differ. The annual impairment analysis conducted
in the last quarter of 2006 determined that none of these assets
were impaired.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
Stock-based compensation expenses are accounted for in
accordance with SFAS 123(R) which requires the measurement
and recognition of compensation expense for all share-based
payment awards made to employees and directors, including
employee stock options and restricted stock units based on
estimated fair values on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s Consolidated
Statement of Operations.
Our revenue is concentrated among a small number of clients.
Revenue and accounts receivable from our largest clients for the
periods ending March 31, 2007 and 2006, were as follows:
The following tables summarize the value of the Company’s
cash and marketable securities held in its investment portfolio,
recorded as cash, cash equivalents or marketable securities as
of March 31, 2007 and December 31, 2006.
As of March 31, 2007, our holdings were as follows:
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
As of March 31, 2007, our holdings matured as follows:
As of December 31, 2006, our holdings were as follows:
As of December 31, 2006, our holdings matured as follows:
The components of comprehensive income are as follows:
Basic earnings per share excludes dilution and is computed by
dividing net earnings by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
that could occur if securities or other contracts to issue
common stock (i.e., warrants to purchase common stock and common
stock options using the treasury stock method) were exercised or
converted into common stock.
The following is a summary of the number of shares of securities
outstanding during the respective periods that have been
excluded from the calculation because the effect on net income
per share would have been antidilutive:
The following table reconciles the numerators and denominators
of the basic and diluted earnings per share computations:
The Company’s stock incentive plans provide for grants of
options to purchase shares of common stock, awards of restricted
stock, stock appreciation rights and stock units. Incentive
stock options are generally granted to employees. Except for
options exchanged in acquisitions, all options have been issued
with a strike price equal to the fair market value of the option
on the day of grant. The chart below shows some of the other
financial impacts of stock options on our financial statements.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
The table below summarizes the option activity during the
quarter ended March 31, 2007.
At March 31, 2007, 646 options were exercisable. Those
options had an average exercise price of $4.81, an average
remaining contractual term of 6.2 years and an aggregate
intrinsic value of $4,430. During the period ended
March 31, 2007, the weighted average fair value of options
granted was $9.85.
The table below summarizes the restricted stock unit activity
for the quarter ended March 31, 2007.
As of March 31, 2007, $6,018 of unrecognized compensation
cost, net of expected forfeitures, related to unvested
share-based compensation awards is expected to be recognized
over a weighted average recognition period of one and one half
years.
Stock based compensation expense was classified in the statement
of operations as follows:
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
The components of net periodic benefit cost for our statutory
Philippine pension plan are as follows:
During the quarter ended March 31, 2007, we contributed
$468 into the pension plan. We currently expect to make
additional contributions of approximately $500 to the pension
plan during fiscal 2007.
In January 2007, we began entering into foreign currency forward
contracts between the U.S. dollar and Philippine peso that
expire ratably throughout the year. While these contracts are
not designated as hedges, we entered into these derivative
contracts to partially offset the effect of the declining value
of the U.S. dollar against the Philippine peso. Because all
of our revenue is denominated in U.S. dollars and a
majority of our expenses are denominated in Philippine pesos, a
decline in the value of the dollar relative to the peso
adversely impacts our operating margins and overall profit. The
contracts are accounted for in accordance with SFAS 133
“Accounting for Derivative Instruments and Hedging
Activities.” This statement requires that derivative
contracts not designated as hedges be marked to market with
gains and losses of both open and closed contracts recorded in
other income. The gain or loss as of the end of the reporting
period for open contracts is also recorded as an asset or a
liability.
As of March 31, 2007, $55,000 of the contracts were
outstanding and $10,000 worth of contracts had been settled. The
settled contracts resulted in a gain of $137 and the open
contracts resulted in a gain of $806. The total amount recorded
as other income due to our forward contracts is $943. In
addition, the open contracts are recorded as an asset on our
balance sheet of $806. The average exchange rate of both our
settled and open contracts is approximately 49 Philippine
pesos for each U.S. dollar. Based on the value of open
contracts as of March 31, 2007, a 1% change in the value of
the Philippine peso compared to the U.S. dollar would impact
other income/expense by $550.
For the period ended March 31, 2007, the Company generated
pretax income on a worldwide basis while recording a tax benefit
from a loss in the U.S. We recorded a benefit because we
increased our mix of income in countries with tax holidays
resulting in a U.S. tax loss and a corresponding tax benefit in
the U.S. Also, based on our projected income available to offset
our California net operating loss carryovers, we established a
California valuation allowance that resulted in a net decrease
of the tax benefit recorded during the period ended
March 31, 2007 of $200. As a result of the tax benefit from
the tax loss in the U.S. which was partially offset by the
increase in the California valuation allowance, we recorded a
tax benefit of $184 on pretax income of $3,679 and increased our
deferred tax assets by $296. Currently, our deferred tax assets
total $20,556 and consist primarily of U.S. federal and
California net operating loss carryovers that expire from 2012
to 2027.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not some
portion or all of the deferred tax assets will be realized.
Management considers projected future taxable income, customer
contract terms and customer concentrations in making this
assessment. Management reassesses the realizability of deferred
tax assets on a quarterly basis.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
We adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”
(“FIN 48”), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with FASB Statement 109, “Accounting for
Income Taxes”, and prescribes a recognition threshold and
measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our
financial statements. Our evaluation was performed for the tax
years ended December 31, 2003, 2004, 2005 and 2006, the tax
years which remain subject to examination by major tax
jurisdictions as of March 31, 2007. No adjustments were
required upon the adoption of FIN 48.
We may from time to time be assessed interest or penalties by
major tax jurisdictions. In the event we receive an assessment
for interest
and/or
penalties, it will be classified in the financial statements as
tax expense.
The Company operates as two business segments: customer
management services and transcription and captioning services.
Our transcription and captioning service segment is not
separately presented as it currently represents less than ten
percent of the consolidated revenues, assets and profit of the
Company. Substantially all of the Company’s revenue was
derived from
U.S.-based
companies, is denominated in U.S. dollars and recognized by
the U.S. entity.
The composition of the Company’s long-lived assets and
depreciation and amortization between those in the United
States, the Philippines and Costa Rica are set forth below.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
The following summarizes our contractual obligations at
March 31, 2007, all of which represent operating lease
payment obligations.
Year to date rent payments of $1,427 have not been included in
the remaining obligation for the current year.
In 2007, PeopleSupport Properties Philippines Inc.
(“PeopleSupport Properties”), a Philippine corporation
owned 40% by PeopleSupport Philippines and 60% by a statutorily
required pension trust established for the benefit of
PeopleSupport’s Philippine employees, acquired two
undeveloped properties, one in Manila and one in Cebu, for a
total of $8,966. PeopleSupport loaned the money to purchase the
land to PeopleSupport Properties. PeopleSupport is considered to
have a controlling interest in PeopleSupport Properties and its
financial information is consolidated into PeopleSupport’s
financial statements. To the extent PeopleSupport Properties
operates at a loss, no minority interest will be shown in the
financial statements. As of March 31, 2007, PeopleSupport
Properties had recorded cumulative net losses.
In July 2006, we entered into a loan agreement that provides a
revolving line of credit for general corporate purposes and
allows us to borrow up to $25,000. The line of credit terminates
on July 28, 2008 and any amounts borrowed must be repaid at
that time. Loans outstanding under the agreement bear interest
at either the prime rate minus .25% or at LIBOR plus .65%. We do
not have any borrowings outstanding under the loan agreement as
of this time.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements”,
(“SFAS No. 157”) which is effective for
fiscal years beginning after November 15, 2007 and for
interim periods within those years. This statement defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company is in
the process of determining the effect, if any, that the adoption
of SFAS 157 will have on its results of operations or
financial position.
In February 2007, the Financial Accounting Standards Board
issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities —
Including an Amendment of FASB Statement No. 115,”
(“SFAS No. 159”). SFAS No. 159
allows companies the choice to measure many financial
instruments and certain other items at fair value. This gives a
company the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently
reviewing the impact of SFAS No. 159 on our
Consolidated Financial Statements and expect to complete this
evaluation in 2007.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
This report on
Form 10-Q
contains forward-looking statements within the meaning of the
federal securities laws that involve material risks and
uncertainties, including, without limitation, statements about
our expectations regarding our revenues, our clients, our
expenses, our anticipated cash needs, our estimates regarding
our capital requirements and our needs for additional financing.
We generally identify forward-looking statements by using such
terms as “may,” “will,” “could,”
“should,” “potential,” “continue,”
“expect,” “intend,” “plan,”
“estimate,” “anticipate,”
“believe” or similar phrases or the negatives of such
terms. We base these statements on our beliefs as well as
assumptions we made using information currently available to us.
These forward-looking statements are subject to risks,
uncertainties and assumptions, including those identified below
in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Risk
Factors,” as well as other matters not yet known to us or
not currently considered material by us. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected. These risks,
uncertainties and assumptions include, but are not limited to,
our dependence on a limited number of clients, negative public
reaction to offshore outsourcing and the effect of recently
proposed legislation, competitive conditions in the markets we
serve, our ability to manage our growth, the risks associated
with our operations in the Philippines and Costa Rica, and other
risks discussed in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Risk Factors” in this report and in
our latest report on
Form 10-K
filed with the Securities and Exchange Commission
(“SEC”). These forward-looking statements represent
our estimates and assumptions only as of the date of this report
and, unless required by law, we undertake no obligation to
update or revise these forward-looking statements. You should,
however, review the factors and risks we describe in other
reports and registration statements that we file from time to
time with the SEC.
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying
notes, which appear elsewhere in this report. This discussion
contains forward-looking statements based on current
expectations that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those discussed below in “Risk Factors” and
elsewhere in this report.
We are a leading provider of offshore BPO services, including,
customer management, transcription and captioning and other BPO
services. These services are primarily provided from our
facilities in the Philippines and, to a lesser extent, from our
facilities in Costa Rica and the United States. We provide
customer management services to clients in the travel and
hospitality, financial services, technology, telecommunications
and consumer products industries, and transcription and
captioning services in the healthcare and insurance, law
enforcement, entertainment and education markets.
Customer management services support our clients by providing
services to their new and existing customers. Transcription
services entail transcribing analog and digital voice recordings
into customized client reports, and captioning services include
both real-time and offline captioning of television programming
and films for the entertainment and education markets. Our
transcription and captioning business includes transcribing
voice recordings and captioning television, film and educational
content.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
For the three months ended March 31, 2007, we derived a
majority of our revenue from fees, which include:
Substantially all of our revenue consisted of time-delineated or
production-based fees. For the three month periods ended
March 31, 2007 and 2006, approximately 5% of our revenue
was comprised of implementation and training fees. For the three
month periods ended March 31, 2007 and 2006, substantially
all of our revenue was derived from
U.S.-based
clients.
Historically, revenue has been concentrated among three clients.
This concentration has been declining, and for the three months
ended March 31, 2007 and 2006, our three largest clients
collectively accounted for 48% and 51% of our revenue,
respectively. For the three months ended March 31, 2006,
our three largest clients were Expedia, EarthLink and Vonage.
For the three months ended March 31, 2007, our three
largest clients were Expedia, Washington Mutual and EarthLink.
Cost of revenues. Cost of revenues consist
primarily of salaries, payroll taxes and employee benefit costs
paid to the professionals we employ in the Philippines, Costa
Rica and the United States. Employee costs, which account for
approximately two-thirds of our cost of revenues, are paid in
the local currency. Because our revenue is in U.S. dollars
and most employee related costs are paid in the local currency,
we are exposed to the risk of foreign currency fluctuations.
Recently, the Philippine peso has strengthened against the
dollar, resulting in increased costs. While we are not certain
if this strengthening will continue, we have entered into
forward currency contracts in an attempt to offset the impact of
changes in the Philippine peso to U.S. dollar exchange rate.
With the acquisition of the
U.S.-based
Rapidtext and our expansion into Costa Rica, we are now
operating in regions with a higher wage structure than the
Philippines which increased our compensation expense. Because
the Costa Rican colónes to U.S. dollar exchange rate
has been relatively stable and a relatively small percentage of
our expenses are denominated in colónes, we have not
entered into, nor do we expect to enter into, any forward
contracts with respect to the Costa Rican colónes to
U.S. dollar exchange rate.
The non-employee related portion of our cost of revenues
includes telecommunications costs, information technology costs,
rent expense, facilities support and customer management support
costs related to the operation of outsourcing and data centers,
and consulting services related to our customer management
consulting group in the United States. Cost of revenues do not
include depreciation of assets used in the production of revenue.
Selling, general and administrative. Selling,
general and administrative expenses consist primarily of
expenses incurred at our
U.S.-based
corporate headquarters, including sales and administrative
employee-related expenses, sales commissions, professional fees,
information technology costs, travel, costs associated with
Sarbanes-Oxley compliance, marketing programs (which include
product marketing expenses, corporate communications,
conferences and other brand building and advertising) and other
corporate expenses. Selling, general and administrative expenses
increased in the three months ended March 31, 2007, as
compared with selling, general and administrative expenses for
the three months ended December 31, 2006. We expect these
expenses to continue to increase as we add personnel and incur
additional fees and costs related to the growth of our business
and operations. Because of our growth we continue to invest in
both capital and personnel in order to meet our growing
infrastructure needs. While we have recently been able to
leverage selling, general and administrative expenses and
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
achieve economies of scale, during this period of investment and
growth our expenses may precede the associated revenue.
Depreciation and amortization. We currently
purchase substantially all of our equipment. We record property
and equipment at cost and calculate depreciation using the
straight-line method over the estimated useful lives of assets,
which range from one to seven years. We depreciate leasehold
improvements on a straight-line basis over the shorter of the
lease term or the estimated useful life of the asset. We
amortize intangible assets on a straight-line basis over the
useful life of the asset. If the actual useful life of any such
asset is less than the estimated life, we would record
additional expense or a loss on disposal to the extent the net
book value of such asset is not recovered upon sale.
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
costs and expenses and related disclosures. On an ongoing basis,
we evaluate our estimates and assumptions. Our actual results
may differ from these estimates. The following accounting
policies are the policies we believe are the most critical to
assist investors in fully understanding and evaluating our
consolidated financial condition and results of operations.
Revenues are recognized pursuant to applicable accounting
standards, including SEC Staff Accounting
Bulletin No. 101 “Revenue Recognition in
Financial Statements,” (“SAB 101”) and Staff
Accounting Bulletin 104, “Revenue Recognition,”
(“SAB 104”). SAB 101, as amended, and
SAB 104 summarize certain of the SEC staff’s views in
applying generally accepted accounting principles to revenue
recognition in financial statements and provide guidance on
revenue recognition issues in the absence of authoritative
literature addressing a specific arrangement or a specific
industry.
We generally recognize revenue from services as those services
are performed and in accordance with signed client contracts.
Certain implementation fees are recognized ratably over the life
of the contract.
Deferred revenue represents amounts billed or cash received in
advance of revenue recognition. As of March 31, 2007 and
December 31, 2006, our balance sheets reflect
$5.5 million and $4.2 million in deferred revenues,
respectively.
During the three months ended March 31, 2007 and 2006,
non-cash stock-based compensation expense was accounted for in
accordance with SFAS 123(R). We use the Black-Scholes model
to estimate the fair value of our share-based payment awards on
the date of grant. The two key assumptions used in this
calculation are the expected term of the option and the
volatility of the company stock. Based upon a third party
analysis, we estimate the expected term of our options to be
4.7 years. To estimate our volatility, we use a combination
of both a peer group and our historical volatility. We estimated
the volatility of our stock to be 51%. The expense included in
the consolidated statement of operations for the three months
ended March 31, 2007 and 2006, amounted to $1.2 and
$0.5 million, respectively.
We issue both incentive and nonqualified stock options along
with restricted stock units. Most equity awards granted to date
have been incentive stock options.
Effective May 1, 2007, we expect to begin issuing
restricted stock units to manager level employees and above in
lieu of stock options. The awards of restricted stock units will
also be accounted for in accordance with SFAS 123(R).
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
At March 31, 2007, we had U.S. and California net operating
loss carry-forwards of approximately $51.4 million and
$34.3 million, respectively, which may be used to offset
future taxable income. The value of the carry-forwards is
recorded on our balance sheet as deferred tax assets of $20.6.
The U.S. carryforwards expire from 2020 to 2027 and the
California carryforwards expire from 2012 through 2015. The
deferred tax assets, have been partially offset by a deferred
tax asset valuation allowance equal to the deferred tax assets
that we do not believe are more likely than not to be used.
During the three month period ended March 31, 2007, the
Company assessed the deferred tax asset valuation allowance and
determined that $0.2 million of the California state
deferred tax asset would not be utilized. These amounts are
subject to review and possible adjustment by tax authorities.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Management considers projected future taxable income, customer
contract terms and customer concentrations in making this
assessment. Management reassesses the realizability of deferred
tax assets on a periodic basis.
In June 2006, the Financial Accounting Standards Board issued
FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes —
an Interpretation of FASB Statement No. 109.”
FIN 48 clarifies the accounting for uncertainty in income
taxes in an enterprise’s financial statements in accordance
with FASB Statement No 109, “Accounting for Income
Taxes” and prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on the
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006 and the
Company adopted the provisions of FIN 48 effective
January 1, 2007. At adoption, FIN 48 did not have any
affect on our financial statements. See Note 10 for
additional information.
Fixed assets are reviewed for impairment as events or changes in
circumstances occur indicating that carrying amounts may not be
recoverable. When these events or changes in circumstances
indicate that the carrying amount would be impaired,
undiscounted cash flow analyses would be used to assess other
long-lived impairment. The estimation of future cash flows
involves considerable management judgment.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements,”
(“SFAS No. 157”) which is effective for
fiscal years beginning after November 15, 2007 and for
interim periods within those years. This statement defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company is in
the process of determining the effect, if any, that the adoption
of SFAS 157 will have on its results of operations or
financial position.
In February 2007, the Financial Accounting Standards Board
issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities —
Including an Amendment of FASB Statement No. 115”
(“SFAS No. 159”). SFAS No. 159
allows companies the choice to measure many financial
instruments and certain other items at fair value. This gives a
company the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently
reviewing the impact of SFAS No. 159 on our
Consolidated Financial Statements and expect to complete this
evaluation in 2007.
Table of Contents
PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
The following table shows the listed items from our consolidated
statements of operations as a percentage of revenues for the
periods presented (percentages may not aggregate due to
rounding).
Our revenues increased $10.6 million, or 46%, to
$33.6 million for the three months ended March 31,
2007 from $23.0 million for the three months ended
March 31, 2006. This increase was primarily attributable to
an increase of $6.2 million in revenue associated with
services provided to new clients and an increase of
$4.3 million in fees associated with a higher volume of
services to existing clients. We believe this increase primarily
resulted from the overall increase in the demand for outsourcing
services and our ability to capture a larger share of our
clients’ outsourcing needs. We expect revenue to continue
to grow as the market for BPO services continues to expand.
Our cost of revenues increased $10.0 million, or 75%, to
$23.5 million for the three months ended March 31,
2007 from $13.5 million for the three months ended
March 31, 2006. The increase was primarily attributable to
the increase in revenue, the appreciation of the Philippine
peso, decreased utilization due to increased buildouts and the
unexpected decline and ultimate loss of one of our largest
clients. We anticipate that these trends will continue through
much of the year and that our cost of revenues will comprise a
larger percent of revenue than in 2006. Specifically, payroll
related costs increased $7.0 million as we increased our
workforce to meet increased demand for services. Facilities
related costs increased $1.1 million as we added additional
facilities due to our growth and anticipated future growth.
Travel costs increased $0.8 million as we added operations
in Costa Rica and additional cities in the Philippines. Computer
and telephone systems related expenses increased
$0.6 million as we incurred maintenance and buildout
expenses associated with the continued improvements in our
technology infrastructure. Stock based compensation expense
increased $0.3 million.
Our cost of revenues as a percentage of revenues increased from
58% for the three months ended March 31, 2006 to 70% for
the three months ended March 31, 2007.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
Selling, general and administrative expenses increased
$1.6 million, or 32%, to $6.5 million for the three
months ended March 31, 2007 from $4.9 million for the
three months ended March 31, 2006. The increase is
primarily attributable to increased salaries and wages of
$0.6 million and an increase in our allowance for doubtful
accounts of $0.6 million. In addition, stock-based
compensation expenses increased $0.4 million compared to
the period ended March 31, 2006. Our facilities and
telecommunications costs also each increased $0.1 million.
These increases were partially offset by a decrease in
professional fees of $0.2 million. As a percentage of
revenue, selling, general and administrative expenses decreased
to 19% during the period ending March 31, 2007 compared to
21% for the period ending March 21, 2006.
Our depreciation and amortization costs in the three months
ended March 31, 2007, increased $1.2 million or 91% to
$2.5 million from $1.3 million in 2006. The increase
was due to increased depreciation of $0.8 million on
leasehold improvements and infrastructure expenditures
associated with the facilities added in the Philippines
including the PeopleSupport Center, additional offices in Manila
and our offices in Bagio. The depreciation of our U.S. property,
mostly IT infrastructure improvements, increased
$0.2 million and our leasehold improvements, IT and other
equipment in Costa Rica increased depreciation expenses
$0.1 million. Depreciation and amortization is expected to
increase as we continue to expand our infrastructure and
facilities.
Interest income increased $1.1 million to $1.5 million
for the three months ended March 31, 2007 from
$0.4 million for the three months ended March 31,
2006. The increase in interest income was due to increased
investments from the proceeds received from our secondary
offering in November 2006. Interest income is primarily
dependent on our use of funds and, to a lesser extent, the
average interest rate. With most of our capital expenditures
expected in the second half of the year and higher interest
rates compared to last year, interest income is expected to
remain strong for most of the year.
For the period ended March 31, 2007, we recorded other
income of $1.1 million. This is due to our purchase of
foreign currency forward contracts between the Philippine peso
and U.S. dollar. The peso appreciated, resulting in a gain
of $0.9 million. Of this total, approximately
$0.1 million relates to closed contracts and the remaining
$0.8 million relates to open contracts that will be settled
ratably over the next 12 months. In addition, we recorded a
gain on foreign currency translations of $0.2 million on
transactions in the Philippines. We expect other income to
fluctuate significantly over the course of the year as a result
of the purchase of the foreign currency forward contracts. As
the peso appreciates compared to the dollar, other income should
increase and as the peso depreciates compared to the dollar,
other income is expected to become an expense.
For the period ending March 31, 2007, we recorded a benefit
from income taxes of $0.2 million. This compares to a
provision for income taxes of $0.9 million for the period
ending March 31, 2006. We recorded a benefit because we
increased our mix of income in countries with tax holidays
resulting in a tax loss and a corresponding tax benefit in the
U.S. for the period ending March 31, 2007.
We have historically financed our operations primarily through
cash flows from operations, sales of equity securities and
interest income earned on cash, cash equivalents and
investments. As of March 31, 2007, we had
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
working capital of $110.6 million, including cash and cash
equivalents totaling $58.0 million, marketable securities
of $39.3 million and net accounts receivable of
$27.1 million. In addition, we have long term marketable
securities of $27.1 million.
Net cash used by operating activities was $1.8 million for
the three months ended March 31, 2007, which was less than
our net income of $3.9 million for the same period. The
difference is primarily due to the $9.5 million increase in
net accounts receivable. Accounts receivable increased to 81% of
quarterly revenue at March 31, 2007 compared to 56% at
March 31, 2006. This increase is primarily due to delayed
payments by some of our clients that have subsequently been
collected. In addition, accounts payable decreased
$1.6 million and deferred income taxes decreased the total
by $0.4 million. These amounts were offset by depreciation
and amortization expenses of $2.5 million, stock-based
compensation costs of $1.2 million and increased deferred
revenue $1.0 million. In addition, the provision for
doubtful accounts increased $0.6 million, the prepaid and
other expenses increased $0.4 million and deferred rent
$0.2 million.
Net cash used in investing activities during the three months
ended March 31, 2007 and 2006 was $21.1 million and
$15.7 million, respectively. Cash used in investing
activities for the three months ended March 31, 2007 was
primarily comprised of purchases of property of
$9.0 million and equipment of $5.3 million. In
addition, we purchased marketable securities totaling
$46.1 million and received proceeds from the sale of
marketable securities of $39.3 million.
Capital expenditures for the three months ended March 31,
2007 totaled $14.3 million. The two parcels of land in the
Philippines accounted for $9.0 million of that total. The
remaining $5.3 million was primarily spent on
telecommunications equipment, leasehold improvements, computer
hardware and software, and furniture and fixtures in support of
our expanding facilities and infrastructure. Excluding the
development of the land, we expect the remaining capital
expenditures for the year to be between $9.0 million and
$12.0 million. The majority of the budgeted expenditures
are on our information technology infrastructure. While a final
decision has yet to be made as to the timing of the buildout of
the recently purchased property, initial estimates place the
potential capital expenditures associated with those buildouts
at $16.0 million to $17.0 million in 2007. This
represents a portion of the total estimated building and
construction costs of $40.0 to $50.0 million.
Net cash used in financing activities during the three months
ended March 31, 2007 was slightly negative. Some delayed
invoices from our secondary offering in the fourth quarter of
2007 offset the net cash proceeds from employee stock option
exercises and the tax benefits received by the company due to
those exercises.
Based on our current level of operations, we expect that our
working capital and cash, cash equivalents and marketable
securities, will be adequate to meet our anticipated cash needs.
Although we currently have no specific plans to do so, to the
extent we decide to pursue one or more significant strategic
acquisitions, we may incur debt, utilize our line of credit or
sell debt or additional equity to finance those acquisitions.
In July 2006, we entered into an agreement that provides a
revolving line of credit for general corporate purposes and
allows us to borrow up to $25 million. The line of credit
terminates on July 28, 2008 and any amounts borrowed must
be repaid at that time. Loans outstanding under the agreement
bear interest at either the prime rate
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
minus .25% or at LIBOR plus .65%. We do not have any borrowings
outstanding under the loan agreement as of this time.
In January 2007, we began entering into foreign currency forward
contracts between the U.S. dollar and Philippine peso that
expire ratably throughout the year. While these contracts are
not designated as hedges, we entered into these derivative
contracts to partially offset the effect of the declining value
of the U.S. dollar against the Philippine peso. Because all
of our revenue is denominated in U.S. dollars and a
majority of our expenses are denominated in Philippine pesos, a
decline in the value of the dollar relative to the peso
adversely impacts our operating margins and overall profit. The
contracts are accounted for in accordance with SFAS 133
“Accounting for Derivative Instruments and Hedging
Activities.” This statement requires that derivative
contracts not designated as hedges be marked to market with
gains and losses of both open and closed contracts recorded in
other income. The gain or loss as of the end of the reporting
period for open contracts is also recorded as an asset or a
liability.
As of March 31, 2007, $55 million of the contracts
were outstanding and $10 million worth of contracts had
been settled. The settled contracts resulted in a gain of
$0.1 million and the open contracts resulted in a gain of
$0.8 million. The total amount recorded as other income due
to our forward contracts is $0.9 million. In addition, the
open contracts are recorded as an asset on our balance sheet of
$0.8 million. The average exchange rate of both our settled
and open contracts is 49 Philippine pesos for each
U.S. dollar. Based on the value of open contracts as of
March 31, 2007, a 1% change in the value of the Philippine
peso compared to the U.S. dollar would impact other
income/expense by $0.6 million.
As of March 31, 2007, our contractual obligations primarily
consisted of operating lease payment obligations. See
Note 12 for additional information.
While our functional currency for all geographic areas is the
U.S. dollar, our results of operations and cash flows are
subject to fluctuations due to changes in foreign currency
exchange rates, particularly changes in the Philippine peso. For
the three months ended March 31, 2007 and 2006, 65% and
56%, respectively, of our operating expenses were generated in
the Philippines. We derive substantially all of our revenues in
U.S. dollars. A 10% change in the value of the
U.S. dollar relative to the Philippine peso would have
affected our Philippine operating costs by $2.3 million for
the three months ended March 31, 2007. Expenses relating to
our operations outside the United States increased in the three
months ended March 31, 2007 compared to the three months
ended March 31, 2006, due to increased costs associated
with higher revenue generation in customer management services.
We fund our Costa Rican subsidiary through U.S. dollar
denominated accounts. Payments for employee-related costs,
facilities management, other operational expenses and capital
expenditures are converted into Costa Rican colónes on an
as-needed basis. To date, we have not entered into any
derivative contracts related to the Costa Rican colónes. A
10% change in the value of the Costa Rican colónes relative
to the U.S. dollar would affect our Costa Rican costs by
less than $0.2 million for the period ended March 31,
2007.
We had cash and cash equivalents totaling $58.0 million and
marketable securities totaling $66.5 million at
March 31, 2007. These amounts were invested primarily in
money market funds, corporate bonds and federal
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
agency securities. Using our March 31, 2007 balances, a 1%
(100 basis point) change in the interest rates on our
investments would affect our interest income by less than
$0.1 million and the market value by $0.9 million.
For the three months ended March 31, 2007 and 2006, 65% and
56%, respectively, of our expenses were generated in the
Philippines. The Philippines has experienced periods of high
inflation, but the inflation rate has been below 10% since 1999.
For the three months ended March 31, 2007, inflation
averaged 2.9%. This compares favorably with the 7.3% inflation
recorded in the three month period ended March 31, 2006 and
the 2006 annual inflation rate of 6.2%.
(a) Evaluation of disclosure controls and
procedures. We maintain “disclosure controls
and procedures,” as such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Based on their
evaluation as of March 31, 2007, our Chief Executive
Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) are effective and that the financial
statements included in this report fairly present in all
material respects our financial condition, results of operations
and cash flows for the periods presented.
(b) Changes in internal control over financial
reporting. There were no significant changes in
our internal control over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) identified in connection with the
evaluation described in Item 4(a) above that occurred
during the period covered by this quarterly report on
Form 10-Q
and that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting. We intend to regularly review and evaluate the design
and effectiveness of our disclosure controls and procedures and
internal controls over financial reporting on an ongoing basis
and to improve these controls and procedures over time.
From time to time we are involved in various legal proceedings,
which are incidental to the ordinary course of our business. We
do not believe that these routine matters represent a
substantial volume of our accounts or that, individually or in
the aggregate, they are material to our business or financial
condition.
Set forth below, elsewhere in this
Form 10-Q
and in other documents we file with the SEC are important risks
and uncertainties that could cause our actual results of
operations, business and financial condition to differ
materially from the results contemplated by the forward looking
statements contained in this
Form 10-Q.
Other than as set forth below, there are no material changes
from the risk factors previously disclosed in Item 1A of
Part I of our Annual Report on
Form 10-K
for the year ended December 31, 2006. You should not
construe the following cautionary statements as an exhaustive
list. The risk factors contained in this report reflect only
changes from or additions to the risks stated in our
10-K for
2006, and these risks must be read in conjunction with those in
the 10-K.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
For the quarter ended March 31, 2007, our four largest
customers accounted for 57% of our revenues. If we fail to renew
or extend our contracts with our clients, or if these contracts
are terminated for cause or convenience, our clients will have
no obligation to purchase services from us. It is unlikely the
lost revenue would be entirely offset by corresponding
reductions in expenses. Any reduction in revenues would harm our
business, negatively affect operating results and may lead to a
decline in the price of our common stock.
Currently, our forward foreign currency contracts expire ratably
over the next twelve months. Because these instruments have not
been designated as a hedge for accounting purposes, the entire
gain or loss of all contracts is recognized at the end of each
period as other income/expense. For this reason the recognition
of the gains and losses in our financial statements is unlikely
to match the effect of currency fluctuations on our cost of
revenues. This volatility could significantly impact our
financial statements from period to period which may result in
significant fluctuations in our stock price. In addition, the
current correlation between our performance and the value of the
Philippine peso may change. Should that occur, we could incur
significant losses without any corresponding benefit from
decreased costs of operations which could adversely impact our
financial statements or stock price.
We may not be able to lease sufficient space to accommodate our
needs or obtain such space at rates that we are willing to pay.
The inability to accomplish either could adversely affect our
financial statements and growth.
As a first time builder in a foreign country with a history of
instability, we could incur unanticipated expenses or losses
from our lack of experience and knowledge in construction of our
own facilities. These costs could include the failure to obtain
proper permits, building cost overruns, tax and regulatory
payments, unanticipated management and maintenance costs. In
addition, we could overbuild and not be able to sustain the
additional cost structure or underbuild and not receive a
sufficient return on our investment.
Our clients may lack the means or the desire to pay us. Our
clients are billed and expected to pay in arrears. It is
possible that, despite checking our client’s credit
history, we may not be paid after having provided them with an
invoice for services rendered. One of our clients recently
disclosed in their risk factors that they may file for
bankruptcy. Should this occur we may be unable to collect the
monies owed us. This could adversely affect our financial
statements and stock price.
Substantial future sales of our common stock in the public
market, or the perception that these sales could occur, could
cause the market price of our common stock to decline. At
March 31, 2007, 23,528,037 shares of common stock were
outstanding and 2,141,161 shares were to be issued upon the
exercise of outstanding restricted stock units and options. In
addition, we may offer additional common stock in public or
private offerings to raise capital or may issue stock in
connection with acquisitions, which may result in future sales
of stock in the public market.
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PEOPLESUPPORT,
INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
Effective internal controls are necessary for us to produce
reliable financial reports. We are required to periodically
evaluate the effectiveness of the design and operation of our
internal controls. These evaluations may result in the
conclusion that enhancements, modifications or changes to our
internal controls are necessary or desirable. While management
evaluates the effectiveness of our internal controls on a
regular basis, these controls may not always be effective. There
are inherent limitations on the effectiveness of internal
controls including collusion, management override, and failure
of human judgment. Because of this, control procedures are
designed to reduce rather than eliminate business risks. If we
fail to maintain an effective system of internal controls or if
management or our independent registered public accounting firm
were to discover material weaknesses in our internal controls,
we may be unable to produce reliable financial reports. The
inability to publish reliable financial statements could harm
our financial condition and result in a decline in our stock
price.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the
City of Los Angeles, in the State of California, on May 10,
2007.
PeopleSupport, Inc.
Caroline Rook
Chief Financial Officer
(Principal Financial and Accounting Officer)
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