Saturday, March 26, 2005

an Under the Radar play on BPO--PSPT

One trend that has certainly accelerated over the past 5 years is the outsourcing of U.S. service-type jobs to developing nations. Stephen Roach often refers to this as "global labor arbitrage." If an American CEO has a choice between two similarly skilled people for a job, an American and an Indian, the wage differences are too great not to closely examine what the Indian person (or plant or location) can bring to the table. Over the past few years, the business press has devoted considerable attention to the offshore IT outsourcers, particularly those from India. These companies include INFY, WIT, CTSH and Tata. I've looked at these companies pretty seriously but find them rather expensive. Might there be another way to play this trend towards offshore Business Process Outsourcing (BPO)?

One company that I like that's gotten beaten up of late is PeopleSupport (PSPT). They are primarily in the in-bound customer contact business and operate out of the Phillippines. Some reasons for the recent weakness include slightly weaker guidance for the coming year, a looming lock-up expiration and customer concentration risk. Despite these issues, I think there is a lot to like about the story.

  • Probably most significantly, I don't see offshore BPO slowing down. There might be some whining in Congress or certain media outlets, but I think the underlying trend is set.
  • PSPT deals with in-bound calls, email, and web chat. They aren't calling people to bother them. Also, accents from the Phillipine workers are not as harsh to American ears as some others (Indian)
  • The work force is talented. From my experience with U.S. call centers, most reps appear to be disinterested and uneducated. PSPT hires some really talented and motivated individuals. The co. received 78,000 applications in 2004 and hired 1,800 (2%). Clearly PSPT is an employer of choice.
  • Operating margins are around 18% compared to many domestic call centers whose operating margins are in the mid-upper single digits.
  • The PPS (around $8.25) is not ridiculously expensive. AG Edwards sees 2005 EPS at $0.42 and 2006 at $0.60.
  • Besides the cost saving element, PSPT also provides a workforce that are cross trained on the different channels (email, phone, chat) and will cross-sell a client's products if so instructed.
  • Client concentration risk is something that needs to be monitored. The top 4 clients (69% of revenue) are Expedia, Earthlink, a division of Expedia, and Star Number.
I do like the PSPT story a lot. I'm just not that interested on going long on too much right now. Maybe after the lock-up I'll take another look. But I do feel that PSPT can grow the top line at 20% for the next few years (and the bottom line a bit quicker). All in all, it certainly deserves a look.


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