PeopleSupport Reports Record Financial Results for Q4 and Fiscal Year 2005

PeopleSupport, Inc. (Nasdaq: PSPT), a leading business process outsourcing (BPO) provider that offers customer management, transcription, captioning, accounts receivable management and additional BPO services, today announced financial results for its fourth quarter and fiscal year ended December 31, 2005.

• Revenue in the fourth quarter of 2005 was a record $17.0 million, an increase of 35% from the fourth quarter of 2004.
• Net income for the fourth quarter of 2005 was $12.3 million or $0.65 per diluted share, as compared with $3.3 million or $0.18 per diluted share for the fourth quarter of 2004. Net income included a $9.6 million income tax benefit recorded in the fourth quarter of 2005, including additional reductions of the deferred tax asset valuation allowance, compared to a similar $7.0 million net tax benefit in the fourth quarter of 2004.
• For the full year 2005, PeopleSupport reported record revenues of $62.1 million, an increase of 40% over the year ended 2004.
• Net income for the full year 2005 was $22.8 million or $1.21 per diluted share, as compared with $8.3 million or $0.55 per diluted share for the full year 2004. The company recorded a $12.1 million income tax benefit during 2005, including additional reductions of the deferred tax asset valuation allowance, compared to a similar $6.9 million benefit for 2004.

“I am very pleased with PeopleSupport’s excellent results for the fourth quarter and full year 2005,” said Lance Rosenzweig, PeopleSupport’s Chairman and Chief Executive Officer. “We surpassed our revenue growth expectations for 2005, and finished the year with solid overall performance. During the year, in addition to delivering strong financial results from new and existing clients, we achieved several major milestones, including the migration to the PeopleSupport Center, our new regional headquarters and world-class BPO operation in the Philippines.” “We are particularly excited about 2006, as PeopleSupport recently added two new growth engines to our service offering,” continued Lance Rosenzweig. “First, in January 2006, we expanded our BPO offering to include transcription and captioning services, through our acquisition of Rapidtext. Second, in early 2006 we intend to launch operations in Costa Rica, to diversify our geographic operations, and to greatly expand our Spanish and bilingual services.”

Q4 2005 Financial Highlights
Revenues — For the fourth quarter of 2005, PeopleSupport reported record revenues of $17.0 million, as compared to $12.6 million in the fourth quarter of 2004, representing 35% growth over the prior year quarter.

Cost of Revenues — During the fourth quarter of 2005, cost of revenues was $9.9 million, or 58% of revenues, as compared to $7.3 million, or 58% of revenues, in the fourth quarter of 2004.

Selling, General and Administrative — For the fourth quarter of 2005, selling, general and administrative expense was $3.6 million, or 21% of revenues, as compared to $3.0 million, or 24% of revenues, in the fourth quarter of 2004.

Income from Operations — PeopleSupport’s fourth quarter 2005 operating income was $2.3 million, compared to operating loss of $3.9 million in the fourth quarter of 2004, which included the company’s 2002 management incentive plan (MIP) charges of $5.3 million recorded in connection with the initial public offering (IPO).

Net Income — Net income for the fourth quarter of 2005 was $12.3 million or $0.65 per diluted share, as compared with net income of $3.3 million or $0.18 per diluted share for the fourth quarter of 2004. During the fourth quarter of 2005, management determined that it was more likely than not that our deferred tax assets would be realized, having considered our earnings history and future projections, resulting in a reduction of our deferred tax valuation allowance and an associated income tax benefit in our statement of operations. Additional reductions in the deferred tax valuation allowance were $9.7 million and $6.8 million in the fourth quarter of 2005 and 2004, respectively. Net income for the fourth quarter of 2005 also included a charge of $0.1 million relating to the company’s MIP and a charge of $0.2 million of non-cash, stock-based compensation relating to pre-IPO stock options. Net income for the fourth quarter of 2004 included a charge of $5.3 million for MIP payments and non-cash, pre-IPO stock-based compensation charges of $0.4 million. These items had the effect of increasing net income by $9.4 million or diluted earnings per share by $0.50 in the fourth quarter of 2005 and $1.1 million or diluted earnings per share by $0.06 in the fourth quarter of 2004.

Fiscal Year 2005 Financial Highlights
Revenues — PeopleSupport reported revenues for 2005 of $62.1 million, a 40% increase over the $44.5 million reported for fiscal year 2004.

Cost of Revenues — For full year 2005, cost of revenues was $35.5 million, or 57% of revenues, as compared to $24.5 million, or 55% of revenues, for the full year 2004. As a percentage of revenues, cost of revenues increased primarily due to our new PeopleSupport Center infrastructure built in 2005.

Selling, General and Administrative — For fiscal year 2005, selling, general and administrative expense was $12.5 million, or 20% of revenues, as compared to $9.7 million, or 22% of revenues, in fiscal year 2004. Approximate public company costs were $2.7 million in 2005, including first year Sarbanes-Oxley 404 compliance costs, and $0.4 million in 2004 following our IPO on September 30, 2004.

Income from Operations — PeopleSupport’s fiscal year 2005 operating income was $9.4 million, compared to operating income of $1.2 million in fiscal year 2004, which included management incentive plan (MIP) charges of $5.3 million recorded in connection with the company’s IPO.

Net Income — Net income for fiscal year 2005 was $22.8 million or $1.21 per diluted share, as compared with net income of $8.3 million or $0.55 per diluted share for fiscal year 2004. Additional reductions in the deferred tax asset valuation allowance were $12.3 million for fiscal year 2005 and $6.8 million for fiscal year 2004. Net income also included a MIP charge of $0.3 million and $5.3 million in 2005 and 2004, respectively, as well as a non- cash, stock-based compensation charge relating to pre-IPO stock options of $0.9 million and $1.8 million in 2005 and 2004, respectively. These items had the effect of increasing net income by $11.1 million in 2005 and decreasing net income by $0.3 million in 2004. Additionally, these items increased diluted earnings per share by $0.58 in 2005 and decreased diluted earnings per share by $0.02 in 2004.

Cash Flow — Net cash provided by operating activities for the twelve months ended December 31, 2005 was $16.7 million, as compared with $4.8 million for fiscal year 2004. Capital expenditure was $7.3 million in the twelve months ended December 31, 2005, as compared with $7.0 million in fiscal year 2004. PeopleSupport had cash and cash equivalents and marketable securities totaling $51.6 million as of December 31, 2005, up from $41.6 million at the end of 2004. The company has no long-term debt. As of December 31, 2005, PeopleSupport employed more than 4,200 employees worldwide.

Business Outlook
For the first quarter of 2006, the company, including its recently acquired subsidiaries, Rapidtext and The Transcription Company, expects revenues to be between $20.5 million and $21.0 million. For the same period, the company expects net income to be between $1.9 million and $2.0 million, and diluted earnings per share to be $0.10 to $0.11. The first quarter 2006 earnings per share is based on approximately 19.1 million shares outstanding on a diluted basis.