Sykes Enterprises, Incorporated
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good morning, and welcome to the Sykes Enterprises First Quarter 2017 Earnings Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instruction]. Management has asked me to relate to you that certain statements made during the course of this call, as they relate to the company's future business and financial performance, are forward-looking. Such statements contain information that are based on beliefs of management as well as assumptions made by and information currently available to management. Phrases such as our goal, we anticipate, we expect and similar expressions as they relate to the company are intended to identify forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are identified in yesterday's press release and the company's Form 10-K and other filings with the SEC from time to time. Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

[Chuck Sykes:]

Thank you, Denise, and good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises' First Quarter 2017 Financial Results. Joining me on the call today are John Chapman, our Chief Financial Officer; and Subhaash Kumar, our Head of Investor Relations. On today's call, I will provide a high-level overview of our financial results and make some general comments about the business landscape, after which, I'll turn the call over to John, and then we'll open it up for Q&A. I'm pleased to report strong operating performance in the quarter. We delivered solid growth across revenues, operating income, earnings per share and cash flow from operations in the first quarter. Our differentiated solutions offering around digital marketing, demand generation, at-home agents, self-service and global delivery, combined with our scale, is helping us drive new business wins, while taking share from competitors. We saw a healthy demand carry across both reporting segments with EMEA being stand out. In fact, this quarter, now marks 16 consecutive quarters of uninterrupted organic constant currency revenue growth on the back of record quarterly revenues. And the drivers of demand were also helping, expanding most of our vertical markets including industries, such as banking, telecom, Internet, media, travel and retail. I'm particularly pleased by the broad-based demand in our business, which more than offset the slight headwinds from our largest client. Turning to operating margins. Our first quarter consolidated non-GAAP operating margins came in at levels not seen since 2009. This is despite low capacity utilization rates, driven mainly by the increase in capacity additions due to higher projected demand, coupled with previously discussed staffing inefficiencies, particularly, in The United States, which we continue to work through. Meanwhile, EMEA saw its best ever first quarter, margin-wise. Even more impressive, EMEA's operating margin performance came in on lower threshold of revenues implying an improving business mix. Clearlink also had a solid quarter as well, delivering returns ahead of our expectations. And as a nice bookend to the first quarter, we entered into an agreement to acquire the noncore customer engagement assets of a Global 2000 telecommunications services provider. Accompanying those assets, will be a workforce of hard working customer engagement associates led by an equally hard working and talented group of leaders. We've gotten to know this provider quite well over the course of our engagement and believe the transition will be seamless, given we share similar values and culture. I'd like to take this occasion to extend a very warm welcome to them as they join the Sykes' family. I'll provide additional commentary on the transaction on our next earnings call after the transaction closes in the second quarter. With that summary of the first quarter, I'd like to make some general remarks on the business landscape. As we look across the broader economy, the changes taken place, remain a net positive for us. Trends driven by technology, digital adoption and changing consumer habits, are lowering entry barriers for upstarts. These upstarts are either challenging segments or mounting wholesale challenges to virtually all incumbent industries, which in turn, are responding by adapting their business models. This interplay is enabling us to capitalize on opportunities with our incumbent clients as they intensify focus on their core business and seek ways to maximize the customer lifetime value. So whether playing defense or offense, these clients are looking to reduce cost, increase flexibility and generate revenue through outsourcing. They're also extending their channels of customer support, while trying to better understand the customer journey in order to provide a more consistent and effortless customer experience. Upstarts in existing and new industries, meanwhile, are themselves looking to elevate their customer engagement strategies as a point of differentiation by leveraging their digital infrastructure. In both instance, clients are seeking trusted partners with a track record of performance that can provide a comprehensive and differentiated portfolio of offerings around customer acquisition, service delivery, demand expertise and scale. All of which is yielding new logo wins and share gains as underscored by our sustained and strong financial performance. So in closing, we're off to a good start to the year and we are raising our full year 2017 business outlook. We continue to work through the staffing inefficiencies we called out late last year as we execute against our 2017 operating and financial goals. And the just announced transaction is also a nice complement to our U.S. based operations, which should create opportunities for further value creation in the future. So with that, I'd like to hand the call over to John Chapman. John?

[John Chapman:]

Thank you, Chuck, and good morning, everyone. On today's call, I'll focus my comments on the first quarter results, particularly, key P&L, cash flow and balance sheet highlights. After which, I'll turn to the business outlook for second quarter and full year. From a revenue perspective, we came in at $384 million for the first quarter of 2017, right at the top end of the business outlook revenue range of between $380 million and $385 million. On a year over year comparable basis, revenues were up 19.7% on a reported basis, up 7.9% on a constant currency organic basis. This is the best level of first quarter growth in almost three years. By vertical market, on an organic constant currency basis, year over year growth was fairly broad based, spanning almost all verticals. Both technology and other were up almost 15%. Financial services was up around 11%, communications up 5%, transportation and leisure was up 4%, more than offsetting the healthcare [wellness] vertical which was down almost 15%. First quarter 2017 operating margin increased to 6.8% from 6.3% for the comparable period last year. On a non-GAAP basis, first quarter 2017 operating margin is 8.3% versus 7.9% in the same period last year. With the increase due to strong operating performance in EMEA, margin accretion from Clearlink and a slight calendar shift in the Easter holiday, which fell in April in 2017 versus March and 2016. First quarter 2017 diluted earnings per share increased 34.5% to $0.45 from $0.33 in the comparable quarter last year, with the increase due to combination of factors including strong operating performance in EMEA, accretion from Clearlink, the calendar shift in Easter as well as a lower effective tax rate. On a non-GAAP basis, first quarter 2017 diluted earnings per share were $0.54 versus $0.42 in the same period last year, with the increase related largely to the aforementioned factors. First quarter 2017 diluted earnings per share were higher relative to the company's February 2017 business outlook range of $0.37 to $0.41. Of the $0.13 outperformance relative to the top end of the business outlook, $0.02 came from other income expense, $0.03 was from a lower effective tax rate and the remaining $0.08 was from solid operating performance. Turning to our client mix. On a consolidated basis, our top 10 clients represented approximately 50% of total revenues during the first quarter, up 1 percentage point from a year-ago period due to the inclusion of Clearlink, these clients overlap with Sykes. Absent Clearlink, the concentration from our top 10 clients would have decreased slightly to 48% versus 49% on a comparable basis last year due to broad-based demand in the current quarter. We continue to have only 1 10%-plus client, our largest client, AT&T, which represents multiple distinct contracts, including the demand generation business from Clearlink, represented 16% of revenues in the first quarter, largely unchanged from a year-ago period. However, excluding Clearlink, client concentration with our largest client came down to 14.7% in the quarter due to broad-based demand. Our second-largest client, which is in the financial services vertical, represented 6% of revenues in the first quarter of 2017 versus 6.3% in a year-ago period. Now let me turn to select cash flow and balance sheet items. Net cash provided by operating activities in the first quarter was up 35.7% to $37.2 million from $27.4 million, with the increase driven mostly by strong operating performance in the quarter, working capital swing factors, coupled with the contribution from Clearlink. During the quarter, capital expenditure was $17 million, representing 4.4% of revenues versus 5.1% in a prior year quarter. Our balance sheet at 31st of March remains strong with cash and cash equivalents of $286.8 million, of which approximately 92% or $264 million was held in international operations. At quarter end, we had $267 million in borrowings outstanding with $173 million available under our $440 million credit facility. We continue to hedge some of our foreign exchange exposure. For the second quarter and full year, we are hedged approximately 48% and 40% at a weighted average rate of PHP48.44 and PHP48.43 to the U.S. dollar, respectively. In addition, our Costa Rica colon exposure for the second quarter and full year is hedged approximately 49% and 47%, at weighted average rate of CRC552.25 and CRC556.73 to the U.S. dollar, respectively. Receivables were $321.9 million. Trade DSOs, on a consolidated basis for the first quarter, were 73 days, down one sequentially, down 4 days comparably. The DSO was split between 71 days for the Americas and 83 days for the EMEA. Depreciation and amortization totaled $18.5 million for the first quarter. Now I'd like to review some seat count and capacity utilization metrics. On a consolidated basis, we ended first quarter with approximately 47,900 seats, up roughly 4,800 seats comparably and up 200 seats sequentially. Included in the first quarter seat count are 1,300 seats associated with Clearlink. Year-over-year comparable seats increased even excluding reflecting capacity additions for higher projected demand. The first quarter seat count can be further broken down to 41,000 in the Americas region and 6,900 in EMEA. Capacity utilization rates at the end of the first quarter were 73% for the Americas and 81% for EMEA versus 77% for Americas and 82% for EMEA in the year-ago quarter. The decrease in the Americas utilization was driven principally by capacity additions for higher projected demand. The capacity utilization rate on a combined basis was 74% versus 78% in the prior year-ago period, with the decline mainly due to capacity additions for higher projected demand, coupled with previously discussed staffing inefficiencies. Now let's turn to the business outlook. Our business outlook does not reflect any contribution from the asset purchase transaction. We plan to provide an update on the revenue enhancements from the asset acquisition when we report our second quarter 2017 financial results. We're excited about this opportunity, even though we expect this transaction to be neutral to our 2017 diluted earnings per share. The deal complements our core business and has a strong cultural fit. Another thing worth pointing out, as with this win, we get ready-made revenues and delivery infrastructure across four sites with both existing and new strategic clients, that span the financial services and technology verticals. Moving on, our business outlook for the second quarter 2017 relative to the reported first quarter 2017 financial results, reflect a combination of fewer workdays despite [Audio Gap] shift and Easter holiday to the second quarter, some demand seasonality associated with some clients and ramp costs associated with staffing for demand for the third quarter of 2017. For the full year 2017, we are increasing our diluted earnings per share range relative to the business outlook provided in -- on February 27 while keeping revenues range-bound. Our revenues and earnings per share assumptions for the second quarter and full year are based on foreign exchange rates as of April 2017. Therefore, the continued volatility in foreign exchange rates between the U.S. dollar and the functional currencies of the markets we serve, could have a further impact, positive or negative, on revenues on both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter and full year as discussed. We anticipate total other interest expense of approximately $1.5 million for the second quarter and $5.2 million for the full year. The amounts in the other interest income expense, exclude the potential impact of any foreign exchange gains or losses. We expect a reduction in our full year 2017 effective tax rate relative to the outlook previously provided with the decline due to a shift in the geographic mix of earnings to a lower tax rate jurisdictions, coupled with tax benefit resulting from the adoption of ASU 2016-09. Considering the above factors, we anticipate the following financial results for the three months ending June 30, 2017. Revenues in the range of $374 million to $379 million; an effective tax rate of approximately 31%; on a non-GAAP basis, an effective tax rate of 33%; fully diluted share count of approximately 42 million; diluted earnings per share of approximately $0.21 to $0.24; non-GAAP diluted earnings per share in the range of $0.30 to $0.33; capital expenditures in the range of $18 million to $22 million. For the 12 months ended December 31, 2017, we anticipate the following results. Revenues in the range of $1.58 billion to $1.595 billion; effective tax rate of approximately 28%; on a non-GAAP basis, an effective tax rate of approximately 30%; fully diluted share count of approximately 42.2 million; diluted earnings per share of approximately $1.71 to $1.78; non-GAAP diluted earnings per share in the range of $2.07 to $2.14; and capital expenditures in the range of $55 million to $65 million. With that, I'd like to open the call up for questions. Operator?

[Operator:]

[Operator Instructions] And our first question will come from Bill Warmington from Wells Fargo. Please go ahead.

[William Warmington:]

So I want to start off by asking on this acquisition that you guys did. If I'm doing the math right on it, looks like you paid 0.1 times revenue. So my hats off to you. I guess, that's what happens when you put a Scotchman in charge of negotiation. John, that looks pretty impressive. And why -- but -- So in that context, I wanted to ask about -- little bit about client mix, the lines of business, any client concentrations there, client overlap, get a little more color?

[John Chapman:]

Yes, I think, Bill, I think, it looks on the face of it like it's a great deal. And we actually truly believe that, certainly, in 2017, it could well be. But we did pay a price relative to where the current performance is, where the current client concentration is. So while we feel really good, we are obviously taking on new leases, new capacity. But we absolutely get nice clients, one of which is overlapping with us and actually helped us in making this deal happen. It's not that largest client, this is significant client. The good thing is, it's not teleco market, it's technology. And it's in technology, in the B2B space, which, for us, we don't have a huge amount of and it's really quite exciting. And then the other client is in this, other clients in financial services. So on the face of it, you're absolutely right. It looks like a great deal. But we've got work to do to make sure that we can deliver and get this moving towards our corporate average results. But we are confident we can get there. We are acquiring a great management team. They've got some really interesting employee engagement work they've been doing. One thing you might think is the U.S., where you're struggling today is, is it wise to be doubling down if you like and [really] as being something we're doing. In contrast, to some of the challenges we have in the U.S., they are just not exhibiting those challenges. So not only is this a nice acquisition for us, we're hoping we can learn some of the things they're doing well that can maybe even help us and our challenge that we've got in the U.S. today.

[William Warmington:]

You touched on my second question, which was to ask about the lower utilization on the year-over-year basis. And it would seem on the surface that you were losing some ground in the U.S., so maybe you can talk a little bit about the excess capacity issue, and then bringing on additional U.S. capacity?

[John Chapman:]

Yes, I mean, you're right. It looks, if you look at the numbers, like we're losing ground. But remember, Americas is both nearshore and offshore. And we always knew that as we went into Q2, we were not really forecasting how the U.S. labor issues behind us, and we knew we were adding capacity in the offshore and nearshore markets. So it's not that we've went backwards in the U.S., it just looks that from the percentage because we added seats nearshore and offshore. I would, It's fair to say that we only spoke about 2 months ago in the U.S., and we are still working that plan. And I wouldn't say we've made giant strides forward, that means we think we can fix the issue sooner than we thought, but we are still just working through that plan today.

[William Warmington:]

And the last question for me, was just to ask about Clearlink. Looks like the, on a pro forma basis, year-over-year was doing about 24% growth, which is pretty strong, certainly, a lot stronger than the rest of Sykes. So just to ask about a little bit more color on what's driving that...

[John Chapman:]

Sorry Bill, you broke up right at the end there.

[William Warmington:]

Sorry, just asking for some color on what's driving that.

[John Chapman:]

Bill, it's really a continuation what we've seen since we acquired the guys and they've really delivered exceptionally well for us. We always guided that this is a transaction that could really move our growth number, and we still truly believe that. We've got lots of nice opportunities in the digital marketing space. They are absolutely seeing better growth in our core business, but that's what we expected. Do we think they're going to continue being in the 20's and 30% growth? Probably not. But we are absolutely believe the acquisition was a great deal for Sykes. We're working on a go-to-market strategy to try and bring the 2 companies together. But, as a stand-alone company, I don't think we could have asked for more than what we've delivered so far.

[Operator:]

The next question is from Vincent Colicchio from Barrington Research. Please go ahead.

[Vincent Colicchio:]

Chuck, I'm curious do you expect AT&T to be down for the year? And could you give us more color why it's down?

[Chuck Sykes:]

Yes, well, with the relationship there, that -- it's a really dynamic relationship in the sense we're working with about 4 different business units. And with all of the strategic decisions and things, Vince, that they're making around DIRECTV and where we're positioned with wireless given org changes that they've made. It is impacting us a little bit as they are adjusting their company structure to be aligned really with our strategy going forward. So I think on a go-forward basis, when you look at the -- just the totality of our relationship, we really don't think it will be deteriorating. And this isn't really the things that are happening with that relationship. It's not really indicative of any other underlying current around relationship or other fundamentals or things like that, that are shifting. We do have some aspects that have gone offshore in our growth, which will change the dynamics a little bit. The other aspect of it too, Vince, is that, the communications vertical. When we're speaking of staffing inefficiencies, one; Keep in mind in the U.S., I mean, it probably represents about 40% to close to 50% of our U.S. capacity. So it's pretty specific to that vertical. It's just kind of the attributes of those programs, are kind of raising our head a little bit to be a bit more problematic for us and our ability to attract and really to hold on to people, and that's something that we're working really hard to get resolved. That is impacting too, what the potential could be there for the growth. So kind of in our guidance is little bit, I would say, missed opportunity, which is probably making the numbers there too, look a little worse than really what they are, meaning the demand is there. But we just got to get the folks working. And -- so that's probably just a little bit of commentary -- John, there is more you'd add or to say?

[John Chapman:]

No.

[Vincent Colicchio:]

Okay. And then on EMEA, obviously, a strong quarter. I'm curious how sustainable is the current margin level?

[Chuck Sykes:]

Well, I mean,it's certainly, with Q1, we were quite fortunate that with our capacity utilization kind of in the zone, running in the 80 -- low 80% range, when the volumes were coming in and they were coming in pretty strong there for Q1 with it our folks were utilized. We had a nice lift on our gross margin, which is great to see. The second thing is that we are seeing, and again, this is particularly within communications, and communications, as you guys know, is a significant vertical for us. We are seeing more variability being added into the contracts. Meaning, there's this convergence that we see happening in our industry between sales and service, which again is a big part of why we really did the deal with Clearlink. For us, the way that we see the world unfolding ahead. But the other thing is just even incentives around penalties and bonuses, and the European team had really, really good operational delivery. And we saw some good commissions coming in, bonuses coming in. So I give you that background to say, do we see it to where it's sustainable? It is sustainable. But it is one of those things when you're looking at the variability on bonuses and all, it's a little difficult to always want to predict you're going to earn repeditively on the high side. So we kind of take middle-of-the-road there, which is why you'll see some -- a little bit of a drop compared to a really strong Q1 performance. So the short answer to your question is, yes, we think they're in a point that they can continue, whether or not they continue perform they did in Q1 is more indicative, as whether or not they can continue to earn those commissions and bonuses. And certainly, they're working hard to do that. But we don't always guide, to where that's going to be achieved. I don't know if John, there's more to add?

[Vincent Colicchio:]

And then you're at home business was up modestly year over year, down sequentially, which it tends to do. Just curious if it will grow in a meaningful way this year? And if you think in this currnet environment, it's still a differentiator that helps you win business?

[Charles Sykes:]

Yes. Vince, we do. We believe very much again. I think we all read about this. We refer to it as kind of the new world of work where you want to call it dig -- gig society or whatever. I mean, flexibility is key, and particularly, when you hear us talking about staffing inefficiencies in the U.S., it's -- that is a topic that I do not, at least in my experience and I'm sure with you guys, I'd be surprised if that's a new commentary that's coming out across people in The United States in various industries, I certainly hear a lot out about it. I think that's going to increase the interest in our home agent platform. We had two setbacks over the course of our journey since we did the Alpine deal. One being that several of the customers that we had, moved offshore. I mean, home agent is not a differentiator in the sense of price to offshore, they're two completely different things. But for clients that want to have domestic-based programs given in a tough labor market, we think it's going to be -- really need is lot more. The second setback that we had was, really in a last few years, all of the heightened concern around cyber security, certain segments of our clients did get concerned about having home agents. But we are beginning to see that fear is beginning to wane a little bit. And I would say, you're going to see a little more relevance of the home agent platform as we continue to go forward.

[Operator:]

Our next question is from Mike Malouf from Craig Hallum Capital Group.

[Unidentified Analyst:]

This is Eric on for Mike. Thanks for taking my questions. So I just wanted to get back to the acquisition a bit, and going off the previous question that was 0.1 times revs, was that a competitive acquisition? I'm just wondering why or how you guys were able to get that such a favorable value?

[Charles Sykes:]

Yes, I -- it is technically is an acquisition. But the way I think of it really, Eric, it's really more as we work with a customer of ours to help implement a solution. And yes, it was competitive in the sense they had options as who else to work with. But this was not a core part of their company. They weren't running it like a typical Sykes type of company in outsourcing main business. I mean, I think anyone that was under a position, would see the total logic and what it was that was driving the decision. The challenge is that, there aren't a whole lot of clients, and the clients needed to be a big part of their comfort in wanting to pick the partner. So I'd answer you straight up saying yes, it was competitive, but at the same time, it was more like who could work with the clients and our client, put together with the best solution to try to get the transition to be smooth and transitioned over. And so for our customer, I mean, they're offloading quite a few number of people and some assets, and again a business that just isn't really what they are all focused enough. So we had to compete in that sense, but not in a traditional, if you think of an acquisition like a process being run, not really in that sense. You know.

[Unidentified Analyst:]

Okay. That makes sense. I appreciate the color there. And then I just wanted to get some color on kind of net seats you guys are expecting to add in 2017. I mean, given the slight overcapacity or whatever in the Americas, just kind of seeing what you guys are expecting in terms of the seats for the year?

[John Chapman:]

Yes, we don't really talk about splitting it by Americas and EMEA. But we expect, we'll only add probably 2,000 net seats this year. And that obviously excludes the asset acquisition transaction. So you should see our seat count going up by 2,000-plus whatever we announce in terms of number of seats we took over as part of the asset acquisition.

[Unidentified Analyst:]

Okay. Great. And then not really able to give much color on the geographic break down there?

[John Chapman:]

No, not just now. There will be a mix of EMEA and Americas, but there won't be any in domestic U.S. It will be, we are still seeing demand nearshore, mainly, rather than offshore. So I think, it'll be more, mainly nearshore in EMEA, you'll see it go up.

[Operator:]

Our next question is from Joan Tong from Sidoti & Company. Please go ahead.

[Joan Tong:]

I'm still trying to understand your second quarter guidance a little bit. So if I look at year-over-year basis and you're looking for, assuming like Clearlink is lapping that one year. So you're looking for only 3% revenue growth. So assuming all organic growth. So can you just quantify how much of that calendar shift in Easter impacting second quarter on a year-over-year comp basis?

[John Chapman:]

Yes, I mean, Obviously, I think you've picked up Clearlink obviously impacts a bit. EMEA, remember, had an exceptional Q1. EMEA's workdays in Q1 to Q2, I think, it's like 8% less than -- so there's a significant decrease this year because of that. We normally see between 130 to 180 basis points, it's a bit larger. I mean, some of that is because we do have excess capacity, and the impact of that excess capacity is just a little bit more as this year than it would normally would be. So yes, so we do see a slightly higher for those reasons. But again, it's not too far adrift of what we would expect. We still have the U.S. overhang, the U.S. labor issues in Q2. And in fact, if you actuall,- the way we've modeled it, the actual issues due to that, are actually slightly higher in Q2 than they were in Q1. So again that's also contributing to the what looks like quite a significant sequential reduction.

[Joan Tong:]

Okay. But on a year-over-year basis, that 3%, if I take the midpoint...

[John Chapman:]

Yes, the constant currency is still 6%.

[Joan Tong:]

Got it. Got it. I see. And then the full year guidance and you raised the EPS guidance, obviously, it's due to tax rate. So should we assume that now at this point of the time of the year that you are looking out to next couple of quarters? Do you think that your revenue or your performance in the U.S. would be slightly lower than before, but then your EMEA performance would be a little bit better for the next couple of quarters?

[John Chapman:]

Yes, I mean, I think, if you think look at the guidance, one of the impacts on the tax rate, you're absolutely right. Despite -- if you exclude this discrete event in Q1, the rate has come down. Why is that? Yes, we are doing slightly better than what we originally anticipated in EMEA and that helps out tax rate, and we're doing slightly worse in the U.S., which helps our tax rate. So not hugely material, but enough that it moves that tax rate -- the couple of percentage points that its moved.

[Joan Tong:]

Okay. Okay. And then higher level questions regarding, Chuck, your comments, the tight labor supply and potentially some labor wage inflation going forward. And to the extent that you can pass through or have your client share that burden going forward in the near to medium term, I'm just wondering with all these headlines talking about like bringing business back to the U.S., would that make the conversation easier? Like going forward to potentially raising prices and like solving the staffing inefficiency problem factor?

[Chuck Sykes:]

Yes. Joan, we certainly hope so. It's 1 of those things, where -- I don't want to say the industry, I mean, and I guess I should only speak for Sykes when I think of this. But probably with just the pace of change, the growth that we did in adding the equivalent of about seven centers in United States over the last couple of years. And we've got a little bit to where when we did that. I think our wage rates and just where we were in the state of the economy was in the different place. And it's come up on us pretty quick. So the conversations, our clients have budgets as like we do and it can become a bit challenging. But to your point, when we're talking to them about it now, it's not like we're talking about a subject they're not familiar with. I think we're all seeing now in the headlines, how many of the banks, some of the retailers, we've seen insurance companies announcing how they're raising and increasing wages getting into the $14 range. And so to that, I do believe that is helping us now with our conversation. We have been able to get some relief from some of our clients, but not quite enough on a broad basis. I think it's also going to, maybe, impact some of their decisions on how much more they grow offshore, which I think, is why for us and our seat additions, why this year we're not really planning on adding anymore seat capacity domestically. So that's probably a bit indicative of people looking at the labor market as well. But this is also why we also believe our home agent platform is going to become a little more relevant because there's a real need out there to come up with creative solutions as we look at that. So the good news is, as we're talking about it, I say this is kind of a distinct. We're in that point of flex right now, where we're feeling the impact and the change. The good news is, though, is that I believe that as the industry does adjust to it because they do still want U.S. based solutions. I think long-term, it can be a good help for us as clients come to the realization as we are, we'll have to make those adjustments. And then they'll need to be the ones that are figuring on how they can pass that on if possible, for those that are staying with the domestic-based strategy. So longer-term, it's -- I think actually it could work out to be a plus for us.

[Operator:]

Next question is from Frank Atkins from SunTrust. Please go ahead.

[Francis Atkins:]

Wanted to ask a little bit about the financial services vertical, are you seeing any areas of strength or weaknesses or changes in that particular vertical?

[Charles Sykes:]

No, as a company, for us, Frank, we're continuing to see nice growth opportunities there. And interestingly, again, it's kind of the state of the times, we do see a lot of activity related to just doing fraud support for around deposits even on the credit card side. That something that I think is driving a quite a bit of demand. But the other thing is that we do see some new banks, actually, that we've recently brought on, which are relatively new to outsourcing, which I think, is a nice sign for us in that vertical. So it's right now it's an industry for us that we continue to see good growth ahead. And we're continuing to do a good job in protecting the programs that we have; we've taken account share.

[Francis Atkins:]

Okay. Great. And could you give us a quick update on where you stand on, kind of, non-voice or digital capabilities, in a growth rate and size?

[Charles Sykes:]

Yes, It's not something right now with us that we're breaking out separately, as you know. But for us, interestingly, I mean, voice is still 85% -- probably pretty going close to 90% of our total core business. The digital though is certainly something that we are continuing to see in certain segments, particularly in the technology side for us. We're experiencing some good programs there in the growth. But it hasn't quite gotten to the point that it moves the needle as much for us as the voice opportunities do. I'm not saying that that's not something for us relevant in the future. I think digital is going to become more and more relevant in the future for us, and particularly, as we continue to look at combining our digital marketing capabilities with our service platform capabilities. I think it's going to be significant. But you're even when you look at companies out there and we've met several that their core focus is in digital. It's a nice place to be. But when you look at the sheer size of the companies and even when you look at where their percent mix is, I'd say that the challenge in service is still around people over voice transactions, which is a bit interesting. And I think the reason why you're going to continue to see that, and this is something we've talked about probably for the last four years, as we look at, I don't think it's not new to Sykes, I think the industry sees it. But the simple transactions when we use that term digital are going to more solved self serviced. And I think the more complicated ones are going to require voice transactions more and more. So I think that's why we all hear about digital. But I think, digital, to a large extent, is not just chat but it's self-serve. And I think it's another reason why voice continues to be very relevant for us. Because the more complicated transactions kind of require it.

[Francis Atkins:]

Okay. Great. And you talked a little bit about the wages and the impact of the U.S. labor market there. Can you talk a little bit about outside the U.S.? Are you seeing any changes in wages or labor dynamics outside the U.S?

[Charles Sykes:]

Well, we do. But a lot of the times, it's really in a different sense. So if you go into and think about the Philippines, the wage pressure that we had there was -- it really is the pace of change in which the industry was migrating there. Keep in mind, in 1997, we were the first U.S. outsourcer in the Philippines, and we had 15 people there. And today in that same community, there's well over 1 million people working in our industry. So we did experience that, from time to time, but here's the big difference. Given the pace of change and just the growth now that's kind of steady state within the Philippians, but looking at their labor growth supply, they're in a better position than we are in United States. In the United States, the labor growth rate, I think, is projected in the next 10 years to be around 0.5. And if you look at our demographic, in which 68% of all workers in The United States are in the age of 19 to 30-year-old. That segment is not growing quite as fast. So you have a much different dynamic as to what's happening with wages and why. The other thing is currency. So as to dollar continues to strengthen in those cases, you'll see a different wage pressure effect at what happened in those countries where their currency is weakening. But the big thing, again, is that we'll get these little spots, where may be in Manila, we've had to adjust and all. But once the growth, just the intensity of it slows down a little bit, we're able to hire and get people to work and the attrition rates are lower. In The United States, we have the opportunity, but it's a different thing. We don't really have a labor supply, is what we're experiencing. And it depends what part of the country that you're in. Everybody is migrating to the Southeast, Southwest and the Mountain States. So that's having a profound impact in certain locations within the U.S. So we can have a whole meeting about this, right, to tell you the truth and talking about it. But it's something that we keep watching very closely.

[John Chapman:]

Yes, to respond to the U.S. is only labor market that's causing us angst at this point in time. We've got lots of tight labor markets across Europe -- I mean, Germany is a very tight labor market but it's just not with that same growth rate in Germany as we have in the U.S., and just not appear as challenging as the U.S. either.

[Chuck Sykes:]

Yes.

[Francis Atkins:]

Okay. Great. And last one for me. Can you talk a little bit about the pricing environment for offshore work as you think about clients' decisions to make the onshore, offshore change and those wage dynamics.

[John Chapman:]

Yes, I mean, pricing is, I would describe as stable. And the differential between the U.S. and offshore is stable. I mean, it's roughly 50%. As the U.S. labor rates increase, obviously, that changes. But I would say or describe it as stable and not discount from the U.S. rate, it's probably been very consistent for the last 10 years I would say.

[Operator:]

And the next question is from Dave Koning from Baird. Please go ahead.

[David Koning:]

And I guess, first of all, your margin was so good in Q1, well ahead of expectations, but your full year guidance now is, for core kind of revenue and margins, is relatively intact. So I'm just wondering what basically outperformed in Q1? And then the rest of the year, actually, I guess, theoretically, I guess you could say, you kind of guided little less than what it used to be. Are you just being conservative or did something really pull into Q1 that you didn't expect or how should we think of that?

[John Chapman:]

I think it was not the U.S. The U.S. did not over perform in Q1 versus our expectation. We over performed pretty much across the globe and especially in EMEA, as we've said. Clearlink did slightly better, EMEA did better, we did better offshore, we did better nearshore. U.S., was pretty much where we expected it to be. We still are forecasting we'll have the U.S. labor challenges in Q2. And what I would say is we have probably bled some of that into the back half of the year. And that's where you probably have seen that we've kept the margin number the same. But Q2 to Q4, slightly degraded. That's really as a result of us really looking at the U.S. and just making sure we're comfortable with that kind of plan and the success plan we've got in place to address our labor issues.

[Chuck Sykes:]

And Dave, other point to on John saying on the Q1. Remember, with the bonuses, the commissions and everything and achievement, we just haven't extrapolated out for the rest of the year, that it's always going to be as high or in that level, but it doesn't mean it can't be. So I don't really want to think of that necessarily as being conservative. I hope its being smart or at least being little more accurate on kind of what you think the steady-state expected value can be of those things. But I think when you get those comps and to your point, you're looking at Q1, saying why can't you extrapolate out and kind of keep it going. Those are probably the factors that do, we pull back a little bit with it.

[David Koning:]

That makes sense. Yes, it was just so good in Q1, it's pretty incredible. And then, I guess, secondly, the tax rate, that's where a lot of the juice kind of pushing estimates higher for this year for EPS, at least, is coming from. Is that something that is sustainable into next year or maybe partially like, I think, we're at 32% next year and you're guiding to, I think, 30% this year now, are we too high for next year's tax rate, should it be closer to 30?

[John Chapman:]

No, I mean, if fix our U.S. issues, we are -- our tax rate will go back up, David. It's a function of that. I mean we obviously had the discrete event that helped us in Q1. And we really expect, and if you model our business based on where we wanted to be, we'll be back in the low 30s next year. It's not structurally changed. I think it's just the impact of the weaker U.S. performance, better EMEA performance and not impacting us this year. So I would not change year 2018 guide -- estimate.

[David Koning:]

Okay. Got you. And then it's my last thing, just everything was so good, the only -- really the only thing looked a little weak across the whole press release really, was the health segment being down, I think, you said 15% or so, is that just the Canadian business or like what's happening there?

[John Chapman:]

No, there's a bit of it the Canadian. But we also had -- we had a couple of smaller programs that really reduced, but we actually had a relatively significant client that moved offshore, David. So when that happens you get this kind of impact on your revenue number. It doesn't really hurt your bottom line too much, but you'll get quite a significant impact. And because it's not a huge vertical for us, when you get these moments, you can get a significant percentage change quite quickly.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Chuck Sykes for any closing remarks.

[Chuck Sykes:]

Yes, thanks, Denise. And just thank everyone again. Really appreciate the time, understand looks like you all have busy days today and tomorrow with these simultaneous earnings. So really appreciate the everyone's time today. And we look forward to updating you guys next quarter. Have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.