The year 2010 saw continued recovery for the US, our main source of business, posting positive economic growth for the year. The US Dollar against the Philippine Peso was stable at comparable levels prior to the Global Financial Crisis.

Australia, on the other hand, a fast growing market for our services, has managed to weather the global recession well. The Australian Dollar remained strong against the Philippine Peso, at comparable level as that of second half of 2009.

The favorable economic climate translated to a year of growth for your Company. On a consolidated basis, much of the growth came from the Australian business, accounted for mainly by the organic growth in the business  of SmartSalary Pty. Ltd. as well as by the additional fleet management business generated by its newly-formed subsidiary, Smartfleet Management Pty. Ltd.  Also, Stellar Global Solutions Phil.’s (SGSP) Australian business accounts picked up in 2010.  The strong Australian Dollar contributed to both the revenues and bottom line figures of your company.

In this year’s annual report, we highlight the transition and transformation programs of your Company as we focus on our three (3) subsidiaries and their continuing efforts at transforming their businesses and expanding their profitable growth opportunities, namely i) our wholly-owned Australian subsidiary, Samrtsalary Pty. Ltd. (Smartsalary), ii) Stellar Global Solutions Phils., Inc., (SGSP) our joint venture with an Australian partner, and iii) Scopeworks Asia, Inc., (SWA) our wholly-owned transcription company.

Transition, Transform, Transcend
In 2009, Smartsalary acquired the major assets of Melbourne Systems Group (MSG) and a 100% equity stake in SeQoya Pty. Ltd. (SeQoya), which enabled Smartsalary to extend its salary packaging solutions services by providing in-house salary packaging software solutions. In March 2010, Smartsalary continued its efforts at diversifying service lines by acquiring the assets and trading name of Webfleet through a newly incorporated subsidiary, Smartfleet Management Pty. Ltd. (Smartfleet). This acquisition enabled Smartsalary to broaden its revenue stream beyond traditional salary packaging, leveraging on the Company’s existing customer base and expertise. In 2010, with just ten (10) months of operations, Smartfleet has contributed a 9% growth in Paxys Australia’s consolidated revenues versus 2009. This transformation towards an expanded service portfolio is set to deliver more growth opportunities for Paxys Australia.

2010 also saw the fruits of SGSP’s Open-Book Management (OBM) Program, which was launched in 2009. As it transitions towards its OBM philosophy in 2010, SGSP focused on instilling the importance of learning the language of business to its managers. They embarked on educating non-finance employees with the basic understanding of key financial KPIs, which has helped them create a culture that emphasized employee accountability and empowerment. This transformation on the SGSP organization inspired them to deliver 18% more revenues at higher profit margins, thereby yielding a 79% increase in Net Profits versus prior year, which mostly came from the increased business from the Australian market.  The success they’ve had in 2010 encourages them to rise above the challenge of developing their business, as they grow and expand their infrastructure, mainly due to growing Australian accounts in 2011.

Our data transcription company, SWA, on the other hand, embarked on a more robust training and development program for its agents in 2010. This has led to having highly-trained agents handling more complex business scenarios. They have likewise leveraged on this outcome by implementing stronger incentive programs that encouraged their agents to hit their operational KPI targets. The achievement of their operational KPIs has contributed to SWA’s improved profitability in the second half of 2010. And as they continue to transition towards enhanced operations through improved quality of their services, SWA established an ISMS team to prepare the company in gearing up for its ISO/IEC 27001:2005 certification goal in 2011.

2010 Results
Paxys’ Continuing Operations closed 2010 with a consolidated service income of Php2.3 Billion, a 7% growth over the Php2.2 Billion service income of comparable operations in 2009. Of the total 2010 service income, 67% or Php1.5 Billion came from Smartsalary, 16% or Php379 Million came from our share in Stellar Global Solutions Philippines (SGSP), and 13% or Php298 Million came from Scopeworks Asia (SWA). The increased service income in 2010 is largely attributed to the increased contribution of Smartsalary, which offset the decreased service income contribution from SWA and Global Idealogy Corporation (GIC).

The consolidated Cost of Services of Continuing Operations was maintained at Php1.1 Billion from 2009 to 2010.  Consolidated Gross Profit of Continuing Operations increased 14%  from Php1.1 Billion in 2009 to Php1.2 Billion in 2010, while Gross Profit Margin increased by 3 percentage points, from 50% to 53% over the period.

Consolidated Operating Expenses of Continuing Operations increased 41% , from Php738 Million in 2009 to Php1 Billion in 2010, mainly coming from higher personnel cost, Smartsalary’s amortization of intangible assets coupled with stronger Australian Dollar to the Philippine Peso over the period, increased rent expense and from one-off expenses related to separation pay and professional fees. Resulting income from operations decreased from Php351 Million in 2009 to Php200 Million in 2010. EBITDA decreased 14% from Php574 Million to Php494 Million over the period.

Proceeds from interest from Continuing Operations increased from a net interest expense of Php11 Million in 2009 to a net interest income of Php24 Million in 2010, mainly coming from Smartsalary’s interest income on its placements. Consolidated Net Income from Continuing Operations resulted to Php102 Million in 2010 from Php383 Million in 2009, with EPS from Continuing Operations showing a decline in 2010 at Php0.11 per share against 2009 income of Php0.34 per share. The decline in Net Income from Continuing Operations was largely due to the higher operating expenses, one-off expenses in 2010, and one-off income in 2009. 2009 included a one-off tax refund granted to Smartsalary worth approximately Php120 Million.  The extraordinary items in 2010 from Continuing Operations consist of Professional Fees worth Php20 Million, Smartsalary’s liability provision worth Php26 Million and acquisition/integration costs worth Php12 M.  Without the extraordinary items in both years, the proforma consolidated Net Income of Continuing Operations in 2010 would have been Php186 Million, 31% lower  than 2009 proforma Net Income from Continuing Operations of Php271 Million.

With the sale of Advanced Contact Solutions (ACS) in January 2011, the Philippine Financial Reporting Standards 5 (PFRS 5), require that ACS be presented as “Non-Current Assets Held for Sale” and “Discontinued Operations” in the consolidated Financial Statements. ACS yielded a Net Loss of Php130 Million in 2010 from a Net Loss Php146 Million in 2009. 2010 Net Income from Discontinued Operations also includes Php243 Million worth of impairment on the goodwill of Paxys in ACS.

Our Industry Outlook
The size of the global outsourcing revenues in 2010 has approximately grown to around US$425 Billion from US$373 Billion in revenues it posted in 2009. The 13.9% growth in 2010 is lower than the 14.4% growth it had in 2009. The Philippine BPO industry grew by 26% to US$8.9 Billion in 2010, which came short of the Business Process Association of the Philippines (BPAP) Roadmap 2010 target of around 35% to 40%. Its biggest sub-sector, the contact centers, posted a 21% growth over 2009, overtaking India’s revenues and making the Philippines the world leader in voice-based customer services. The Philippine non-voice sector, on the other hand, grew at 30% in 2010. The other outsourcing sectors in the Philippines, namely IT, transcription, animation, and game development have also been reported to be recovering from the global financial crisis as orders are being placed and stalled contracts are now being implemented.

In its IT-BPO Roadmap: 2011-2016, BPAP targets to hit 10% market share by 2016 from a 7% market share in 2010, projecting a baseline growth of 15% per annum up to a potential growth of 25% per year. With the continued recovery from the crisis, and collaboration and support from the government, stakeholders and academe, the industry is positive about reaching its potential.

Our Initiatives
The Company has set a strategic direction that will continue to diversify its target markets and service lines to reduce exposure to one particular market or industry. Further, it shall continue to develop and gain expertise in chosen service offerings. The Company shall continue to support its call center partners, Stellar and WNS Holdings, as they pursue their growth initiatives. It shall also continue to pursue growth in its expanded portfolio of salary packaging and fleet management business in Australia. In view of this strategic direction, Advanced Contact Solutions (ACS) was sold to Alorica International Ltd. (Alorica) in January 2011. Alorica owns Precision Response Corporation, LLC (PRC), the major customer of ACS. The sale excludes assets, contracts and agreements not related to the servicing of PRC clients. The resources obtained from this transaction shall be mainly used for future investments and settlement of debts.

The sale of ACS was the first step in executing the current strategy of repositioning Paxys to better capitalize on the emerging opportunities in the BPO industry.  This differentiation strategy focuses on building a global organization delivering hosted, vertical specific solutions and cloud services to mid-sized companies in select, high growth industries, e.g. healthcare.  Investments in next generation IP enabled networks, utility priced hosted services and business analytics will provide the means for Paxys to provide integrated agent assist and self care solutions through multiple platforms.  These capabilities will permit Paxys’ clients to lower customer support costs while enhancing customer revenue and retention.

Also, your Company established Paxys Global Services, Inc. (PGS), to provide executive, marketing, finance and operations shared services for the Paxys subsidiaries. Together with this, the Company acquired shares of Paxys Global Services Pty Ltd (PGSPL) from Global Idealogy Corporation (GIC), which resulted to a 100% direct ownership over PGSPL, from a 60.26% effective ownership through GIC.

We are optimistic about the outlook of our industry and look forward to continue carrying out our growth strategies.

Thank you for your unwavering support.

Tarcisio M. Medalla
Chairman & CEO
PAXYS, Inc.