SGS Stream Global Services,

Stream Global Services, Inc., (NYSE AMEX: SGS), a leading global business process outsource (BPO) service provider specializing in customer relationship management and business process outsourcing services for many Fortune 1000 companies, today announced consolidated financial results for the three and nine months ended September 30, 2010. On November 3, 2010, Stream also filed its Quarterly Report on Form 10-Q with the Securities and Exchange Commission for the quarter ended September 30, 2010.

Quarter Highlights

• On a GAAP basis:
  • Revenue for the quarter ended September 30, 2010 was $197.1 million, an increase of $75.2 million, or 61.7%, from the same period last year, primarily reflecting the acquisition of eTelecare Global Services, Inc. (“eTelecare”) on October 1, 2009 and the inclusion of the eTelecare business in Stream’s results of operations. Revenue for the third quarter increased over the second quarter of 2010 by approximately $13.2 million reflecting the ramp of new client wins during 2010.
  • Gross margin for the quarter ended September 30, 2010 was 42.2% compared to 40.5% for the same period in 2009.
  • Operating margin for the quarter ended September 30, 2010 was (1.5)% compared to (2.5)% for the same period in 2009.
  • Net loss was $12.6 million and $44.6 million for the three and nine months ended September 30, 2010, compared to net loss of $6.8 million and $7.6 million for the same periods in 2009.
• On a Non-GAAP basis, as if the acquisition of eTelecare had been completed on January 1, 2009:
  • Revenue for the quarter ended September 30, 2010 was $197.1 million, an increase of $3.2 million, or 1.7%, from the same period in 2009. Gross margin for the quarter ended September 30, 2010 was 43.2% compared to 42.9% to the comparable period in 2009.
  • Adjusted Pro Forma Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) increased from $10.7 million for the three months ended June 30, 2010 to $21.9 million for the three months ended September 30, 2010, and increased $5.9 million from $16.0 million for the comparable prior year period.
• At September 30, 2010 the balance of our revolving line of credit was $22.6 million, representing a decrease of $2.6 million from the revolver balance at June 30, 2010. The company had $66.1 million available to draw upon at September 30, 2010.

Americas Region

Revenues generated from our Americas region, which includes the United States, Canada, the Philippines, India, Costa Rica, Nicaragua, Dominican Republic and El Salvador, was $146.3 million and $425.4 million for the three and nine months ended September 30, 2010 compared to $72.1 million and $227.7 million for the three and nine months ended September 30, 2009. The growth in our revenue over the prior period is primarily attributed to the acquisition of eTelecare on October 1, 2009.

Gross profit generated by the Americas region was $62.7 million and $181.7 million for the three and nine months ended September 30, 2010.

EMEA Region

Revenues generated from our EMEA region, which includes Europe, the Middle East and Africa, was $50.9 million and $152.2 million for the three and nine months ended September 30, 2010 compared to $49.7 million and $155.5 million for the three and nine months ended September 30, 2009.

Gross profit generated by the EMEA region was $20.5 million and $58.1 million for the three and nine months ended September 30, 2010.

Selling, General and Administrative Expense

Selling, general and administrative expenses, which includes certain service center costs, was $66.0 million, or 33.5%, of revenue during the three months ended September 30, 2010, compared to $41.9 during the same period in 2009. This increase is primarily attributed to the acquisition of eTelecare on October 1, 2009. On a pro forma basis, as if the acquisition of eTelecare had been completed on January 1, 2009, selling, general and administrative expenses decreased by approximately $6.5 million for the quarter ended September 30, 2010 compared to the same period ended September 30, 2009.

Other Income and Expense, Including Income Taxes

Other income and expense for the quarter ended September 30, 2010 was $6.6 million, an increase of $3.9 million, or 144.4%, for the same period in 2009. The main driver for this increase was interest expense incurred for our $200 million high yield bonds issued October 1, 2009. Interest expense for the three months ended September 30, 2010 was $7.8 million. Realized and unrealized foreign exchange gains and losses, net, were a gain of approximately $1.2 million for the three months ended September 30, 2010.

Liquidity and Capital Resources

At September 30, 2010, our cash and cash equivalents, excluding restricted cash was $21.2 million. Our accounts receivable at September 30, 2010 were $171.4 million and our days sales outstanding were 76 days. Our total debt outstanding at September 30, 2010 was $233.4 million, which included $22.6 million due on our revolving line of credit and $192.3 million in 11.25% Senior Secured Notes net of discount. At September 30, 2010, we had approximately $66 million of availability under our revolving line of credit. For the quarter ended September 30, 2010, our cash flow from operating activities was $9.5 million, representing an increase of $12.2 million from the same period in 2009.

CEO Commentary

Kathryn Marinello, Chairman and Chief Executive Officer of Stream said; “Since joining Stream on August 19, 2010, I have spent significant time touring our service centers and meeting our employees, as well as our clients. I am very pleased and encouraged by the caliber of our employees and the positive impression our clients have of our services. These factors, I believe, are why Stream continues to win new business. Working with our Board of Directors and senior management team, we are creating a vision that ensures long-term value for our employees, clients and shareholders enabling Stream to be both the Employer of Choice in the workplace and the Supplier of Choice for our clients.”

Stream will hold a conference call for investors on November 4, 2010 at 9:00 AM EDT. Investors can participate by calling 800-723-6751 and referencing passcode 2057404.

About Stream Global Services:

Stream Global Services is a leading global business process outsource (BPO) service provider specializing in customer relationship management services including sales, customer care and technical support for Fortune 1000 companies. Stream is a trusted partner to some of the world’s leading technology, computing, telecommunications, retail, entertainment/media, and financial services companies. Stream’s service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce of over 30,000 employees capable of supporting over 35 languages across 50 locations in 22 countries. Stream strives to expand its global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for its clients. To learn more about the company and its complete service offering, please visit www.stream.com.

Safe Harbor.

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including forward-looking statements regarding our business expectations and objectives. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, risks relating to the Company’s ability to maintain and win additional client business, continue to maintain its operating performance and margin expansion, continue to have sufficient capital to grow and maintain our business, retain the Company’s management team and effectively operate a global franchise across multiple jurisdictions plus other risks detailed in the Company’s filings with the U.S. Securities and Exchange Commission (“SEC”), including those discussed in the Company’s Annual report on Form 10-K for the year ended December 31, 2009 and quarterly reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.

Stream does not intend, and disclaims any obligation, to update any forward-looking information contained in this release, even if its estimates change.

The required reconciliations and other disclosures for all non-GAAP measures used by the Company are set forth in a schedule attached to this press release and in the Current Report on Form 8-K furnished to the SEC on the date hereof.

Non-GAAP Financial Information

This release contains non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of Stream’s performance or liquidity, should be considered in addition to, not as a substitute for, measures of Stream’s financial performance or liquidity prepared in accordance with GAAP. Non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how Stream defines non-GAAP financial measures in this release.

Stream's management uses the non-GAAP financial measures in the accompanying schedules to gain an understanding of Stream's comparative operating performance (when comparing such results with previous periods) and future prospects and excludes certain items from its internal financial statements for purposes of its internal budgets and financial goals. These non-GAAP financial measures are used by Stream's management in their financial and operating decision-making because management believes they reflect Stream's ongoing business in a manner that allows meaningful period-to-period comparisons. Stream's management believes that these non-GAAP financial measures provide useful information to investors and others in (a) understanding and evaluating Stream's current operating performance and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner Stream’s current financial results with its past financial results.

All of the foregoing non-GAAP financial measures have limitations. Specifically, the non-GAAP financial measures that exclude certain items do not include all items of income and expense that affect Stream's operations. Further, these non-GAAP financial measures are not prepared in accordance with GAAP, may not be comparable to non-GAAP financial measures used by other companies and do not reflect any benefit that such items may confer on Stream. Management compensates for these limitations by also considering Stream’s financial results in accordance with GAAP.

         

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

 

Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010     2009 2010     2009 Revenue $ 197,146 $ 121,875 $ 577,625 $ 383,159 Direct cost of revenue   113,946     72,568     337,783     224,587     Gross profit   83,200     49,307     239,842     158,572       Operating expenses: Selling, general and administrative expenses 66,001 41,913 198,522 126,903 Transaction related, restructuring and severance expenses 3,746 3,189 8,716 3,917 Depreciation expense 11,226 5,214 33,691 13,979 Amortization expense   5,130     2,050     15,630     6,862   Total Operating expenses   86,103     52,366     256,559     151,661     Income (loss) from operations   (2,903 )   (3,059 )   (16,717 )   6,911   Other income and expense, net   6,586     2,731     21,178     8,240     Loss before provision for income taxes (9,489 ) (5,790 ) (37,895 ) (1,329 ) Provision for income taxes   3,091     986     6,665     6,314     Net loss   (12,580 )   (6,776 )   (44,560 )   (7,643 )  

Preferred stock beneficial conversion feature, accretion and dividends

  —     2,582     —     6,261     Net loss attributable to common shareholders $ (12,580 ) $ (9,358 ) $ (44,560 ) $ (13,904 )   Net loss attributable to common shareholders per share: Basic and diluted loss per share $ (0.16 ) $ (0.99 ) $ (0.56 ) $ (1.47 )   Shares used in computing per share amounts: Basic and diluted shares $ 80,070 $ 9,446 $ 79,861 $ 9,450          

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Balance Sheet

(Unaudited)

(In thousands)

 

 

September 30,2010

December 31,2009

Assets: Current assets: Cash and cash equivalents $ 21,444 $ 14,928 Accounts receivable, net 171,437 175,557 Other current assets   37,129   36,901 Total current assets 230,010 227,386 Equipment and fixtures, net 80,503 96,816 Goodwill, intangible assets, and other long-term assets   339,419   356,621 Total assets $ 649,932 $ 680,823     Liabilities and Stockholders’ Equity: Current liabilities $ 117,297 $ 115,337 Line-of credit 22,632 15,501 Long-term debt 192,345 191,379 Capital lease obligations 10,496 11,279 Deferred income taxes 19,768 21,050 Other long-term liabilities   21,724   22,866 Total liabilities 384,262 377,412   Stockholders' equity   265,670   303,411 Total liabilities and stockholders’ equity $ 649,932 $ 680,823            

STREAM GLOBAL SERVICES, INC.

Non-GAAP Financial Information

Pro Forma Combined Consolidated Condensed Statements of Operations

(Unaudited)

(In thousands)

  Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010     2009 2010   2009 Revenue $ 197,146 $ 193,854 $ 577,625 $ 595,394 Direct cost of revenue   112,011     110,779     335,848     336,637     Gross profit   85,135     83,075     241,777     258,757     Gross profit as a percentage of revenue 43.2 % 42.9 % 41.9 % 43.5 %   Operating expenses: Selling, general and administrative expenses 64,905 71,415 197,396 206,762 Transaction related, restructuring and severance expenses 3,746 6,890 8,716 9,939 Depreciation expense and amortization expense   16,356     14,868     49,321     43,674     Total operating expenses 85,007 93,173 255,433 260,375   Income (loss) from operations   128     (10,098 )   (13,656 )   (1,618 )   Other income and expense, net   9,617     3,722     24,239     20,166     Loss before provision for income taxes (9,489 ) (13,820 ) (37,895 ) (21,784 ) Provision for income taxes   3,091     845     6,665     7,047     Net loss $ (12,580 ) $ (14,665 ) $ (44,560 ) $ (28,831 )    

Adjusted Earnings Before Interest, Taxes, Depreciation & Amortization (“EBITDA”)

Income (loss) from operations as shown above 128 (10,098 ) (13,656 ) (1,618 ) Depreciation and amortization expense 16,356 14,868 49,321 43,674 Transaction, one-time, restructuring and severance expenses 4,462 10,997 10,221 13,318 Stock-based compensation expense   924     207     3,695     531     Adjusted EBITDA $ 21,870   $ 15,974   $ 49,581   $ 55,905  

Note: The results above for 2009 represent the arithmetic combination of Stream’s and eTelecare’s historical operating results, with no historical purchase adjustments or consolidating entries, other than conforming adjustments to reflect items of revenue and expense on a consistent basis. The accompanying GAAP basis financial statements reflect the acquisition of eTelecare as of October 1, 2009.

           

STREAM GLOBAL SERVICES, INC.

Reconciliation of GAAP to Non-GAAP Pro Forma Information

(Unaudited)

(In thousands)

  Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010     2009 2010     2009 Gross profit as shown on a GAAP basis $ 83,200 $ 49,307 $ 239,842 $ 158,572

Presenting realized foreign exchange gains (losses) on consistent basis with eTelecare

1,935 - 1,935 1,170

Inclusion of eTelecare in operating results for the period prior to acquisition

- 33,768 - 99,015  

Gross profit as shown on a proforma basis

$ 85,135 $ 83,075 $ 241,777 $ 258,757     Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010 2009 2010 2009 Operating expenses as shown on a GAAP basis $ 86,103 $ 52,366 $ 256,559 $ 151,661

Presenting realized foreign exchange (gains) losses on consistent basis with eTelecare

(1,096) 25 (1,126) (477)

Inclusion of eTelecare in operating results for the period prior to acquisition

- 40,782 - 109,191   Operating expenses as shown on a proforma basis $ 85,007 $ 93,173 $ 255,433 $ 260,375     Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010 2009 2010 2009 Other (income) expenses, net as shown on a GAAP basis $ 6,586 $ 2,731 $ 21,178 $ 8,240

Presenting realized foreign exchange gains (losses) on consistent basis with eTelecare

3,031 (25) 3,061 1,647

Inclusion of eTelecare in operating results for the period prior to acquisition

- 1,016 - 10,279   Other (income) expenses, net on a proforma basis $ 9,617 $ 3,722 $ 24,239 $ 20,166            

 

STREAM GLOBAL SERVICES, INC.

Reconciliation of GAAP to Non-GAAP Pro Forma Information

(Unaudited)

(In thousands)

  Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010     2009 2010     2009 Net Loss as shown on a GAAP basis $ (12,580) $ (6,776) $ (44,560) $ (7,643) Add (deduct) items to reconcile to non-GAAP Adjusted EBITDA: Provision for income taxes 3,091 986 6,665 6,314 Depreciation and amortization 16,356 14,868 49,321 43,674 Interest expense (income) and financial costs 6,586 2,731 21,178 8,240 Realized foreign exchange gains 3,031 1,656 3,061 1,647 Transaction, one-time, restructuring and severance expenses 4,462 10,997 10,221

13,318

Stock based compensation expense 924 207 3,695 531

Operating income (loss) of eTelecare for the period prior to the acquisition on October 1, 2009

- (8,695) - (10,176)   Adjusted EBITDA $ 21,870 $ 15,974 $ 49,581 $ 55,905