PeopleSupport Reports Record Revenues for Fourth Quarter and Fiscal Year 2004

LOS ANGELES – PeopleSupport, Inc. (Nasdaq: PSPT), an offshore business process outsourcing (BPO) provider that offers customer management and accounts receivable management services for U.S.-based clients from its facilities in the Philippines, today announced financial results for its fourth quarter and fiscal year ended December 31, 2004.

• PeopleSupport reported record revenues of $12.6 million for the quarter ended December 31, 2004, an increase of 47% over the same period in 2003 and 5% over the third quarter of 2004.

• Net income, which is presented in accordance with generally accepted accounting principles (GAAP), for the fourth quarter of 2004 was $3.3 million or $0.18 per diluted share, as compared with net income of $3.1 million or $0.23 per diluted share for the fourth quarter of 2003.

• Net income for the fourth quarter of 2004 reflected certain income and expense items that PeopleSupport considers to be significant and outside the ordinary course of business. These included: a charge of $5.3 million for payments under the company’s 2002 management incentive plan (MIP) in connection with the company’s initial public offering (IPO) and a charge of $0.4 million of non-cash, stock-based compensation relating to pre-IPO stock options. The company also recorded a $6.8 million income tax benefit associated with deferred tax valuation allowance adjustments. The MIP charges impacted both cost of revenues and selling, general and administrative expenses because cash payments were made and accrued to employees in both categories. The cost of revenue portion of the MIP was $0.8 million and the SG&A portion of the MIP was $4.5 million.

• Our management, as well as some Wall Street analysts and investors, use non-GAAP measures to analyze our operating results. Excluding the MIP, stock-based compensation charges and deferred tax valuation allowance adjustments, pro forma net income for the fourth quarter 2004 was $2.1 million or $0.11 per diluted share based on 18.5 million weighted average shares outstanding. Management believes the items excluded from the pro forma calculations do not reflect the company’s operating performance because they relate to events not in the ordinary course of business, the effects of which were recognized in previous quarters. Management believes the non-GAAP measures therefore are useful for evaluating the company’s operating performance. See “Use of Non-GAAP Measures” below and the attached Pro Forma Consolidated Statements of Operations for a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure.

“PeopleSupport delivered an excellent quarter, and we are proud of our achievements throughout 2004,” said Lance Rosenzweig, PeopleSupport’s Founder, Chairman and Chief Executive Officer. “With fourth quarter 2004 revenue growth of 47% year-over-year, revenues surpassed expectations due to recent client pilot programs ramping up and existing clients experiencing higher than expected volume increases. PeopleSupport’s college-educated, fluent English speaking eReps provide what we believe is a unique offering by up-selling and cross-selling complementary products and services to end customers. Providing world-class services, with a sales oriented differentiation, has enabled PeopleSupport to establish strong, long-term relationships with market leading clients.”

“According to analysts, the offshore outsourcing industry is gaining significant momentum and the transfer of professional services to offshore locations continues to accelerate. U.S.-based companies have begun to realize the benefits offered by offshore providers are not limited to lower costs. Benefits also include lower attrition rates among employees and higher quality of service. While several offshore locations provide lower labor costs, few, if any, offer the high quality American English language skills found in the Philippines,” continued Rosenzweig.

Q4 Financial Highlights

Revenues — For the fourth quarter of 2004, PeopleSupport reported revenues of $12.6 million, representing 47% growth over the fourth quarter of 2003 and 5% over the third quarter of 2004. Revenue growth was primarily driven by increased volumes across several industry segments, including travel and hospitality, along with an expansion of new client business volume.

Cost of Revenues — During the fourth quarter of 2004, cost of revenues were $8.1 million (which includes a MIP component charge of $0.8 million) as compared with $3.8 million in the fourth quarter of 2003. Cost of revenues, as a percentage of revenues, increased due to additional expenses related to increased capacity to accommodate ongoing and anticipated growth. This includes increased operational and management staff, including expatriates, non-cash pre-IPO stock based compensation charges and an increased investment in facilities and infrastructure.

Income from Operations — PeopleSupport’s fourth quarter 2004 operating loss was $3.9 million, which includes combined MIP and stock based compensation charges of $5.7 million, as compared with operating income of $3.2 million in the fourth quarter of 2003, which includes a restructuring charge reversal of $0.7 million.

Income Taxes — In the fourth quarter of 2004, PeopleSupport recorded a reversal of a portion of its deferred tax valuation allowance. This is due to the fact that the company has become profitable and, as a result, has determined that it is more likely than not that a portion of the deferred tax assets will be realized. In the fourth quarter of 2004, PeopleSupport recorded a benefit for income taxes of $6.8 million associated with the release of certain valuation allowances.

Net Income — Net income for the fourth quarter of 2004 was $3.3 million or $0.18 per diluted share, as compared with net income of $1.9 million or $0.14 per diluted share for the third quarter of 2004 and $3.1 million or $0.23 per diluted share for the fourth quarter of 2003. Pro forma net income, excluding MIP charges of $5.3 million, $0.4 million of stock-based compensation charges, and the deferred tax valuation allowance adjustment of $6.8 million, was $2.1 million or $0.11 per diluted share for the fourth quarter of 2004. Pro forma net income, excluding $0.1 million of stock based compensation charges, was $3.2 million or $0.24 per diluted share for the fourth quarter of 2003.

Fiscal Year 2004 Financial Highlights

Revenues — PeopleSupport reported revenues for 2004 of $44.5 million, a 48% increase over the $30.0 million reported for fiscal year 2003. PeopleSupport experienced growth from both existing and new clients signed during 2004.

Cost of Revenues — For 2004, cost of revenues was $25.3 million, which includes cost of revenue related MIP charges of $0.8 million, up from $12.9 million for 2003. Cost of revenues increased due to additional expenses related to increased revenues and scale of operations, including increased operational and management staff as well as non-cash pre-IPO stock based compensation charges and an investment in expatriate and Philippine management talent.

Income from Operations — PeopleSupport’s 2004 operating income was $1.2 million, representing a full year operating margin of 3%. Excluding MIP and stock based compensation charges of $7.1 million, pro forma operating income for 2004 was $8.3 million. Excluding stock based compensation charges of $0.1 million, pro forma operating income for 2003 was $8.3 million. With continued growth, PeopleSupport increased its general headcount, production seats and management staff during the year.

Net Income — Net income for 2004 was $8.3 million or $0.55 per diluted share, as compared with net income of $8.0 million or $0.64 per diluted share for 2003. Excluding MIP and stock-based compensation charges of $7.1 million and the deferred tax valuation allowance of $6.8 million, pro forma net income was $8.6 million or $0.57 per diluted share for 2004, as compared with pro forma net income of $8.1 million or $0.65 per diluted share for 2003, which excludes $0.1 million of stock based compensation charges.

Cash Flow — Net cash provided by operating activities for the twelve months ended December 31, 2004 and 2003 was $4.8 million and $10.8 million, respectively. Net cash provided by operating activities for 2004 includes $5.3 million paid to management under the MIP in connection with the company’s IPO. Net cash used in investing activities for the twelve months ended December 31, 2004 and 2003 was $5.9 and $3.6 million, respectively. Capital expenditures were $7.0 million in the twelve months ended December 31, 2004 as compared to $3.4 million in the twelve months ended 2003. Capital expenditures predominately consist of investments in infrastructure and the expansion of delivery capabilities, including the new PeopleSupport Center. Net cash provided by financing activities for the twelve months ended December 31, 2004 was $30.5 million, primarily comprised of net IPO proceeds of $31.6 million, as compared to net cash used in finance activities of $0.2 million for the twelve months ended December 31, 2003.

Cash — As of December 31, 2004, PeopleSupport had cash and cash equivalents totaling $41.6 million.

As of December 31, 2004, PeopleSupport employed approximately 3,600 employees worldwide, compared to approximately 1,800 employees at the end of 2003.

Business Outlook
For the first quarter of 2005, the company expects revenue to be between $12.8 million and $13.2 million. For the same period, the company expects net income to be between $1.5 million and $1.8 million, and diluted earnings per share to be $0.08 to $0.09. Excluding MIP charges of $0.1 million and stock based compensation charges of $0.2 million, respectively, pro forma net income for the first quarter 2005 is expected to be between $1.8 million and $2.1 million. Pro forma diluted earnings per share for the first quarter of 2005 are expected to be between $0.10 and $0.11.

For the full year 2005, revenue is expected to be between $55.0 million and $58.0 million. For the year, the company expects net income to be between $7.5 and $8.3 million, and diluted earnings per share to be $0.39 to $0.43. Excluding MIP charges of $0.3 million and stock based compensation charges of $1.0 million, respectively, pro forma net income for fiscal year 2005 is expected to be between $8.8 million and $9.6 million. Pro forma diluted earnings per share for fiscal 2005 are expected to be between $0.46 and $0.50. 2005 guidance includes public company of approximately $3.0 million, including estimated Sarbanes Oxley 404 compliance costs. Guidance does not include the impact of any stock based compensation charges as required by Statement of Financial Accounting Standards (SFAS) 123R.