An IPO To Profit From Outsourcing & OffShoring (ETEL)

If you think that offshoring and outsourcing may be slowing, think again.  We have already seen waves and waves of IT-outsourcing to India, Romania, Ukraine, and elsewhere.  We have seen waves of manufacturing offshoring to China, even to the point that Mexican factories are not able to compete with the labor costs.  Everyone has likely dealt with a representative from a call center in India or from a Pacific Rim country.

This week there is a filing for an IPO of what the company refers to as "Business Process Outsourcing" which is really an OUTSOURCED CALL CENTER operator.   This company is called eTelecare Global Solutions, Inc. and it plans to list its ADS shares under the ticker "ETEL" on NASDAQ. 

The underwriters are Morgan Stanley, Deutsche Bank, Robert W. Baird, and JMP Securities.  This offering lists 5.5 Million ADS Shares, which represents 11 million ordinary shares; the indicated price range is listed as $12.50 to $14.50 per share as of the filing date.  eTelecare is based in Bagumbayan, Quezon City in the Philippines.

eTelecare provides call centers for operations such as technical support, financial advisory services, warranty support, customer service, sales, customer retention and marketing surveys and research.  It operates from four delivery centers in the Philippines and seven delivery centers in the United States, with approximately 6,800 employees in the Philippines and approximately 3,000 employees in the United States as of December 31, 2006.  It even lists its largest clients: American Express Company, AOL, Cingular Wireless, Dell, Intuit, Sprint Nextel Corporation and Vonage Holdings together representing approximately 91% in terms of revenue for 2006.

eTelecare was profitable in 2006: revenue was $195.1 million, operating margin was 9.9% and net income was $12.2 million. For 2005, net revenue was $152.2 million, operating margin was 2.7%, and net loss was $1.8 million.  This one may be subject to the same rigors of the IPO market and to "emerging markets" but it is the first of its kind in call-center outsourcing and offshoring.  If this works and if it gets a lot of publicity you can imagine there are probably 100 or more companies in India and elsewhere that are looking at this to see if they can come public too.

Here is the guts of its own described business model in the prospectus: We were founded in 1999 by alumni of the management consulting firm McKinsey & Company, who implemented analytical tools and a focus on quantifiable value for the client in the customer care BPO market. Our business model has three key elements: a focus on delivering complex, voice-based BPO services via a multi-shore delivery platform; making significant investments in the quality of our people and processes; and entering into contracts that contain pricing terms that our clients agree are based on the value we create per dollar spent by the client, rather than a pricing model focused solely on being able to deliver the least expensive service offering, or a cost-based commodity pricing model, that we believe is most often emphasized in our industry.  In 2005, our five largest clients collectively represented 83% of our revenue, with Cingular representing 50% of our revenue and Dell representing 17% of our revenue. In 2006, our revenue became less concentrated, with our five largest clients collectively representing 80% of our revenue and our two largest clients, Cingular (now AT&T) and Dell, representing 42% and 18% of our revenue, respectively.

As a public company, its fiduciary responsibility to investors is to grow and to make more money; so it doesn’t care if it replaces jobs and thinking that it will care is not worth the time.  Here is its growth plan:  win new client relationships and further penetrate our existing client base (get more offshore call centers, and increase offshoring with current customers); expand into new industries (more new untapped offshoring); expand into new markets and delivery geographies (Open in new offshore countries and take this more global); and continue to invest in human capital development (teach call-center employees English and support functions).  If you think for a second that outsourcing is slowing, guess again.  At least US-based call center workers now have a hedge they can invest in if they are worried about their job being outsourced. 

Jon C. Ogg
March 14, 2007