Sykes Enterprises, Incorporated
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Good day and welcome to the Sykes Enterprises, Incorporated First Quarter 2016 Financial Results Conference Call and Webcast. All participants this morning will be in listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions. [Operator Instructions] Management has asked me to relay 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 is based on the 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 were identified in yesterday's press release and in the company's Form 10-K and other filings with the SEC from time to time. I would now like to turn the call over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

[Charles Sykes:]

Thank you, ma’am and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises first quarter 2016 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 brief recap of our first quarter results and offer some general commentary about the state of the industry and our relative market position. After which I will turn the call over to John and then we will open it up for Q&A. I’m pleased to say that our first quarter results were encouraging, constant currency, organic revenues were up 1.1% comparably. What was most reassuring was that we saw health demand throughput in the quarter from some of the new clients we are onboarding. For instance, a large new client we are ramping in the communications protocol, delivered better than expected volumes in the quarter. We saw similar levels of healthy demand activity from various existing clients across the financial services, technological and retail verticals, specifically offerings around credit cards, retail banking, broadband, wireless and tech products related to the internet of things continue to be the drivers of demand in the market place. Operating margins also came in strong in the quarter. Thanks to the initiatives we’ve been working around agent productivity, gross margins expanded solidly to 35.9% from 33.9% in the year ago period. Consequently non-GAAP operating margins came in at 7.9%, much better than what we forecasted and just shy of last year’s margins, due primarily to heavy investments incurred related to future growth. Our strategies around human capital management everything from talent acquisition to training to driving speed to competency or continuing to yield results. Nothing illustrates the point better than the large communications client highlighted earlier where we were able to ramp around a 1,000 agents simultaneously across our at-home agent platform and brick-and-mortar both onshore and offshore in the span of four months, without compromising our operational readiness across the enterprise. And finally, our earnings per share for the quarter came in above the top end of the range we provided and largely in line with the prior year, due to the growth investments we mentioned. We drove strong cash flow generation in the quarter and sustained our strong balance sheet as we announced an additional 5 million share repurchase plan. As we look across the industry landscape, we are very excited about our market positioning. As the outsourcing trend continues, we are capturing business where Greenfield opportunities are emerging and we were taking share of from competitors where vendor consolidation is occurring. Against this backdrop, our industry is undergoing a shift which has the potential to unlock significant additional opportunities. This shift is being driven by the ecosystem of internet, social media, mobile, marketing and analytics which is accelerating the commerce cycle of business. Naturally, as our clients were starting to look at the service continuing definitely than they have in the past. They want to better understand the customer journey and draw insight across the sum of all interactions a customer has with their brand in order to drive an effortless customer experience. They want to engage with partners that can take the lead with solutions and encompass the full customer life cycle, ranging from digital demand generation to customer support. With the acquisition of Clear Link which closed in April, we now offer a global customer interaction management platform that is in the sweet spot of our client’s needs as expands digital marketing, demand generation, sells customer support and retention. In fact, positive feedback from clients around the Clear Link acquisition is an early indication that are new positioning is already resonating in the market place. To realize the full potential of our joint capabilities and capitalize on future revenue synergies, we are fostering alignment across key elements of sells, operations, IT, HR and finance, in addition to branding and communications. We believe that dragon alignment while preserving the differentiators that made each company a success, will bring the best of both to our client base. In closing, we continue to strengthen our market positioning by innovating our business platform. We did so when we acquired Alpine Access which gave us best to breed at home agent delivery and talent acquisition capabilities. We did it with [indiscernible] which is leading with its subservice solutions, and we’re now doing it with Clear Link, with our operating platform underpinned by it’s sweet of offerings that is second to none, differentiated delivery model and a global scale combined with strategic and operational focus. We are well positioned to execute against our business plan for the remainder of the year and beyond. 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 focus my comments on the first quarter results, particularly key P&L, cash flow and balance sheet highlights I'll turn to the business outlook for the second quarter and full year. From a revenue perspective, we came in at $320.7 million, right at the midpoint of our business outlook range of $318 million to $323 million provided in March. On a year-over-year comparable basis, although revenue was down 0.9% on a reported basis, constant currency organic revenues were up 1.1% in the first quarter of 2016. By vertical markets, on a year-over-year and constant currency basis, travel was up roughly 15%, financial services up almost 11%, other webs go over includes retail up 13%, healthcare up 3% and technology up 1%; all of which was tempered by declines in the communications vertical which was down around 9%. First quarter 2016 operating margin was 6.3% versus 7% in the same period last year which reflects the partial impart of set in transaction costs associated with the acquisition of Clear Link which closed in the second quarter of 2016. On a non-GAAP basis, first quarter 2016 operating margin was 7.9% versus 8.1% in the same period last year, with the delta driven by cost associated with capacity additions and the corresponding program ramps for higher projected demand. Capacity additions and ramp costs in the quarter represent roughly a 110 basis points of margin impact on a comparable basis. First quarter 2016 diluted earnings per share were $0.43 versus $0.47 in the comparable quarter last year, with a decline due to a higher effective tax rate in the first quarter of 2016 coupled with cost associated with the Clear Link transaction, capacity additions and ramps. On a non-GAAP basis, first quarter 2016 diluted earnings per share was $0.42 versus $0.43 in the comparable quarter last year due to cost associated with the capacity additions and ramps. First quarter 2016 diluted earnings per share, however, was higher relative to the company's March 2016 business outlook range of $0.46 to $0.49. Driven by agent productivity gains, coupled with lower than forecast effective tax and other expenses. Turning to our client mix for a moment, on a consolidated basis, our top 10 clients represented approximately 49% of total revenues during the first quarter of 2015, went uptick from the year ago period. We continue to have only one 10%-plus client. Our largest client, AT&T, which represents multiple distinct contracts spread across four lines of business, represented 15.9% of revenues in the first quarter of 2016, down from 18.8% in the year-ago period due to program completions in 2015. After AT&T, client concentration dropped sharply. Our second-largest client, which is in the financial services vertical, represented 6.3% of revenues in the first quarter of 2016 versus 4.6% in the same period last year. On the financial services growth has been driven by new program wins with existing clients. Now, let me turn to select cash flow and balance sheet items. Net cash provided by operating activities in the first quarter was $25.5 million versus $28.6 million which is mostly a reflection of investments and client ramps and working capital swing factors. During the quarter, capital expenditures were $16.2 million. Our balance sheet at 1 March remained strong, with cash and cash equivalents of $259.9 million, of which approximately 91.3% or $237.4 million was held in international operations. Actually we authorized 5 million shares of common stock for repurchase, this amount is an addition to the initial 5 million share repurchase authorized in August 2011, of which approximately 100,000 shares remained to be repurchased. At quarter end, we had $70 million in borrowings outstanding, with $370 million available under our $440 million credit facility. Subsequent to quarter end, on April 1, 2016, the amounts we have closed the acquisition of Clear Link with the cash consideration of $209.5 million, however, approximately $216 million against the credit facility to fund the acquisition. We continue to hedge some of our foreign exchange exposure. For the second quarter and full year, we have hedged at approximately 79% and 67%, at a weighted average rate of PHP 46.89 and PHP 47.12 U.S dollar, respectively. In addition, our Costa Rica colon exposure for the second quarter and full year is hedged at approximately 34% and 35% at a weighted average rate of CRC 546.4 and CRC 547.18 to the U.S. dollar. Receivables were at $286.3 million. Trade DSOs on a consolidated basis for the first quarter were 77 days, up one day sequentially and unchanged comparably. The DSO split was 76 days for the Americas and 81 days for EMEA. Depreciation and amortization totaled $14.4 million for the first quarter. Now let's review some seat count and capacity utilization metrics. On a consolidated basis, we ended the first quarter with approximately 40,100 seats, up roughly 3,200 seats comparably and up 2,000 seats sequentially. Year-over-year comparable and sequential seat increase reflects capacity additions for higher projected month. First quarter seat count can be further broken down to 47,006 in the Americas and 6,100 in the EMEA region. Capacity utilization rates at the end of the first quarter of 2016 were 77% for the Americas region and 82% for the EMEA region, versus 78% for Americas and 88% for EMEA in the year-ago quarter. Decrease in the Americas utilization is driven by past the additions by higher projected demand, while Alpine and EMEA utilization was due to a combination of program completions, lower demand and the exit from a highly utilized facility. Across the utilization rate on a combined basis was 78% versus 80% in the prior year ago period, with a decline due to capacity additions for higher projected demand. Now let's turn to the business outlook. Our second quarter and full-year 2016 business outlook as currently discussed, does not reflect the revenue and earnings contributions including the interest and incremental transaction expenses associated with the Clean Link acquisition which caused April 1, 2016. Full-year 2016 outlook held and does reflect $1.4 million in transaction cost incurred in the first quarter of 2016. As stated previously, we planned to update for the earnings contributions and our second quarter 2016 results. Second, we continue to experience demand trends consistent with what was discussed in the previous business outlook. Forecasted increase in the full-year revenue range of between $1.348 billion and $1.362 billion from between $1.336 billion and $1.354 billion was principally the impact of favorable foreign exchange movements relative to U.S. dollar, which are expected to be relatively neutral to full year diluted earnings per share. Our second quarter revenue relative to the first quarter of 2016 and compared to the same period last year reflect a favorable revenue contribution from the ongoing ramps. However, the combination of cost associated with cap plus the additions and [indiscernible] ramps which are heavily first half weighted as stated previously, coupled with traditional second quarter seasonality are expected to impact operating margin from the second quarter of 2016 relative to the first quarter and compared to the same period last year. Revenues and earnings per share assumptions for the second quarter and full year are based on foreign exchange rates as of April 2016. Therefore, the continued volatility in foreign exchange rates between the U.S. dollar and the functional currencies of the markets we served could have a further impact, positive or negative, on revenues and both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter and full-year. Third, we added roughly 2,400 seats on a gross basis in the first quarter, with the total gross seats planned for the year is still expected to be around 5,700 seats. We planned to add another 1,900 seats in second quarter. We [indiscernible] to rationalize on 1,600 seats in 2016, roughly 700 of which is expected in the second quarter, in addition to the approximate 500 already rationalized in the first quarter of 2016. Anticipate a net seat count increase of approximately 4,100 in 2016 versus 2015. And finally, we anticipate total other interest income expense net of approximately $1 million for the second quarter and $2.9 million for the full year. These amounts include the accretion of the contingent consideration, which is expected to be $0.2 million for the second quarter and approximately $1 million for the year. The amounts, however, exclude the potential impact of any future foreign exchange gains or losses in other income expense. Considering the above factors, we anticipate the following financial results for the three months ending June 30, 2016. Revenues in the range of $322 million to $326 million; tax rate of approximately 45%; on a non-GAAP basis, an effective tax rate of 35%; fully diluted share count of approximately 42.1 million; diluted earnings per share of approximately$0.23 to $0.25; non-GAAP diluted earnings per share in the range of $0.29 to $0.31; and capital expenditures in the range of $20 million to $25 million. For the twelve months ending December 31, 2016 we anticipate the following financial results

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mike Malouf of Craig-Hallum Capital Group. Please go ahead.

[Mike Malouf:]

Hi guys, thanks for taking my questions.

[Charles Sykes:]

Absolutely.

[Mike Malouf:]

So I’m wondering Chuck, if you can just give us a little bit of color on the Clear Link acquisition. I know that you wanted to give some of the real data after the second quarter but we’re at least a month into it and anything that you could give us would be a little bit helpful.

[Charles Sykes:]

Mike, are you anything – you mean in a context more of strategy or rational for doing the deal or?

[Mike Malouf:]

No, I think that we understand that. I’ve just trying to get a sense of roughly the impact that we’ll have on the financials.

[John Chapman:]

Yeah, I mean I really do want to wait until Q2 clearly but again there is nothing changed since we’ve owned these guys for 30 days. We said these guys are growing at double digit, we’ve said they’ve got superior operating margins. We still see it being accretive on our diluted basis – sorry on our pro forma basis this year. You just need to give us time so we can get all of those numbers solid to give you guidance, but I would say that we’re still very confident that they’re going to – whether their growth rate and their evidence probably enhance our numbers but [indiscernible] Q2 update.

[Mike Malouf:]

So when we’re are sort of thinking of Sykes now as a combined with Clear Link, I know I had always thought of Sykes is kind of a 6% to 7% top line grow or just, should we think of this as it’s now really adding to that or maybe we get into the high single digits over the next few years, given the Clear Link acquisition?

[John Chapman:]

Yeah, I mean Clear Link is going to be 10% of Sykes roughly and they’re going to grow at double digit. And so we always look at the 4% to 6%, so you’re absolutely right, when you’re in the math, it clearly moves us under the basis points on our alliance and we’d really hope that that is the case and we’ll show you that in the guidance when we get into Q2.

[Mike Malouf:]

Okay. And then on the telecom sector, AT&T is still doing well there?

[John Chapman:]

Yeah, yeah.

[Charles Sykes:]

Yeah, I mean AT&T is doing well I mean, clearly we’ve saw in Q4 and Q1 some weakness, and if you remember, we spoke about how we did some impart of some of the volume changes in the reductions that we saw last year. And we expect probably Q2 for AT&T probably still to be down at tech, but nothing like what we saw in Q4 and Q1. And I’ll be honest, I think we actually also see Telco we think will start to go again in Q2, and that’ll be a nice change for us in telecom line because that’s been I think [indiscernible].

[Mike Malouf:]

So it’s going to be growing even with all of AT&T sort of stable?

[John Chapman:]

I should say, yes.

[Mike Malouf:]

Yeah great, okay. Great, thanks a lot.

[John Chapman:]

Thanks, Mike.

[Operator:]

Our next question comes from Dave Koning of Baird. Please go ahead.

[David Koning:]

Yeah, hey guys, nice job. And I guess first of all, just the big new buyback that’s interest just I guess the size of it, and I guess the last one you did, you also did a big one that lasted for I think over 10 years if I remember right. The timing of this one is interesting just given you’re making such a big acquisition right now and presumably you wouldn’t have a lot of extra cash to do it. Is it more just the timeframe of being almost done with the one?

[Charles Sykes:]

Yeah, it’s exactly that. We’d also done with the one, strategies really not changed, we just want to make sure that [indiscernible] there, so we went ahead and go by it then, yeah.

[David Koning:]

Okay, okay. And then I know – you know you mentioned, you made a couple of comments on Clear Link just very high level but is there seasonality we should think of because we put Clear Link in our numbers because we know what’s going to obviously be in Q2 and just have to make some guesses, but is any of the quarters more or less seasonal to revenue or margins?

[Charles Sykes:]

Yeah, I mean I suppose for us the weakest quarter will Q2, simple as that. The best quarter will be Q3 and the weakest quarter will be Q2, so I’m afraid it doesn’t really change our seasonal mix, in fact it may make a slightly worst to be honest. But yeah, we see that weakest is Q2, Q3 definitely going to be the strongest and Q1 and Q4 not much difference.

[David Koning:]

Okay. And anything interesting you’ve seen out of it, now that I mean you’ve had it in the full now for what 32 days or whatever it’s been and anything kind of interesting or different than what you thought?

[Charles Sykes:]

Nothing I would say financially or anything Dave, everything is consistent in regard – the one thing that we’ve been really encouraged by, you make these decisions based on how you see the market changing and it’s been really encouraging to see the response from quite a few clients. So that’s always a nice affirmation to receive, so obviously it’s early in it but that’s a good response to see.

[David Koning:]

Okay. And then finally just I mean really high level industry perspective, we all kind of remember going back in tougher times kind of in the early 2000s and then after the recession at 2009 and kind of that time but it’s been about five years now, a pretty incredibly stable growth in the economy and industry. And in margins I think across the whole industry have been pretty stable, pricing is pretty stable, I mean is that – do you think that’s exactly what it is a function of – if an economy is pretty stable for this industry it just takes a ton of the turbulence out and it’s much more visible and is that the right way to think about this the last few years and probably going forward?

[Charles Sykes:]

Well, the thing that we’ve always spoken about our industry that we think is very good and that’s still very true today is that in good times companies need to outsource just to be prepared for growth and at difficult times they outsource to be prepared for the downturn to get more flexible. The thing that was so unique about that period is that, you had a convergence of coming out of a recession, you had an extreme amount of focus on offshoring, and in fact, everything was about offshoring, to the extent that we took our capacity in United States down by about 85%, our total U.S. capacity. So, that’s what made that really, really unqiue, and then on top of that you had the do-not-call legislation, so we had some weird pricing pressures and things that were coming in from competitors not normal to this space. Today, I would say that the industry is still surrounded by immense change, but it is really coming more in the form of technology and the whole digital medium, if you will, that’s coming in to play David, and that in our view right now is causing every company that exists today, they have to rethink their business models. We believe with the investments that we are making today, we believe we are making the right choices that’s going to create some nice exciting opportunities for us, but it has been a good period overall. You know, you still have your acute issues that still can present to any one of us that are in this space only because of the nature of our business the way it is so client driven, but it has been a good period, and we are excited about the future too, and the capabilities that we have.

[David Koning:]

Great, well thank you, nice job.

[Charles Sykes:]

Thanks Dave.

[Operator:]

Our next question comes from the Vincent Colicchio of Barrington. Please go ahead.

[Vincent Colicchio:]

Yes, Chuck, I realize that you didn't change your capacity plan for the year, but you added a bit more capacity than expected in the quarter. Given that, I'm curious why you didn't raise your revenue guidance beyond raising it for FX.

[Charles Sykes:]

Hi Vince, Can I just answer that? It was really not changing the overall number. We just had seats that jumped in the portfolio a little bit earlier than we anticipated. We did not have people in those seats. They just basically were in capacity. We expected that to be at the start of the second quarter, it jumped into the end of the first quarter, and so overall there is no real impact to those ramp lines. It is just the seats counted a little bit earlier than we anticipated.

[Vincent Colicchio:]

Okay. Thanks for that. As far as Europe, sequentially you are bit down more than I had expected. I think you were down 7%. What is the strategy there? What caused that and what is the strategy to improve the growth rate?

[Charles Sykes:]

With Europe, we’ve got still – in the Telco sector, we have a couple things that were on programs that the volumes had reduced some, but from a growth standpoint, within Europe, what we are now really encouraged by for us, we still see technology, telecom, financial services, and the travel sectors in Europe being good sources of growth for us, but the other thing is that we are now bringing our virtual platform over to European market, which we think is going to be a real strategic differentiator and helping to grow that space. You know Europe – for everyone that competes in Europe, it is considerably different only in the sense that we refer to it as EMEA, but it really is not as homogenous of a market as the way we think of it you know in the US. So, when you – you can have acute issues that takes place in Germany or something just in Sweden, and it hits you a little differently, but in terms of our growth, I mean we are still expanding capacity particularly when you are looking at the Eastern European area, we really like that area for serving the market. We still are not bringing our virtual platform there, and we are bringing all of our service line extension capabilities, our self-serve, and we will be exploring ClearLink capabilities to expand those service line capabilities into European market place as well.

[Vincent Colicchio:]

Okay. Thanks, Chuck. And then one last one -- health care grew year to year and sequentially, but it is still fairly small and a big opportunity. Remind us of what your strategy to grow that business is currently.

[Charles Sykes:]

It is a couple of things there. One is that when you look at our healthcare vertical, we still have a nice size of that revenue that’s coming from our Canadian marketplace, and that has been a relationship that’s gone on now for well over a decade. So, you are going to see somethings there that, I think, as time goes and it matures, you will see some of that volume decline, but what’s happening apart where we see the growth is now in the US, and it is primarily the insurance sector, and it is in two areas in the insurance sector. It is in typical benefits administration and the other piece is you will see a lot of these insurance companies that are now launching wellness service lines or care coaches and things, and the thing that we are encouraged by that is that our virtual model is really the right delivery platform in terms finding the right people, care coaches and all, we’re not relegated to pick in a geographic location in United States and trying to find a bunch of care coaches for these new product lines that these companies are creating. So, health is still an area that we do see opportunities for us, it has been a little bit slower for us I would say and breaking in on that but it is something that we still see is going to be a nice source of growth for us in the future.

[Vincent Colicchio:]

Thanks for answering my questions.

[Charles Sykes:]

Sure, thing. Thank you.

[Operator:]

Our next question comes from Bill Warmington of Wells Fargo. Please go ahead.

[William Warmington:]

Hey everyone.

[Charles Sykes:]

Hey Bill.

[William Warmington:]

And congratulations on closing the Clear Link acquisition.

[Charles Sykes:]

Thank you.

[William Warmington:]

So a couple of questions for you, the first one being margins, the G&A has been edging up 2014, 2015, this last quarter, what’s driving that, I mean I’m talking specifically as a percentage of revenue and when do we start to see leverage on the G&A if you’re – G&A keeps on growing faster than the top line.

[Charles Sykes:]

Yeah, Bill it’s – the two indicators for you guys external as you look at the company and the things that I would always focus on and answering the question, do you still see leverage that we could have in our margins, I would always look for the aggregated consolidated utilization of seats for capacity, any time it’s under 80% we definitely have leverage there. The other thing that I would ask you to look at is, rather than looking at aggregate G&A or even the aggregate gross profit, I would look at corporate as an expense of the total, and anytime that is over 4% I would say that you have opportunity to leverage. The reason why we point you to look at those two and don’t look at GP or don’t look at G&A is that that can change as our business mix changes. If we suddenly saw the majority of it going offshore, you could see G&A is a percent of revenue increasing but you would also see gross margin increasing, and consequently if you came back to where we were growing in the U.S. you’d see the opposite happening. But the corporate is pretty consistent, anytime you see that over 4% it really had to run around 4%. And as to answer your question why is maybe now it’s over 4%, it is because that some of the stock compensation that we include in our adjusted operating income numbers we had some catch-up based on the performance and that just took ahead. And then the other thing is that we are making investments in some of our internal plumbing of the company to [indiscernible] ERP Financial Systems and we’re doing some pretty significant investments, some things that we believe are going to be good differentiators for the vertical and on the future. But these are just point in times on the curve right now and one thing I’d ask there by keeping in mind is that, we’re adding 5,700 seats this year for a net gain of 401,000. Last year we added 3,300 for a net gain of 100. So you’re definitely seeing in my mind as we sit here in Q1, a good trajectory for growth and I’ll bet those 4,100 seats, 88% to 90% of it is being built for contracts that we have in place, purpose, it’s not Greenfield. So those sort of things that are making the numbers right now, just shy that 8%, but we’re – the company is on its right footing and I think it’s a good pace.

[William Warmington:]

So second question on the technology vertical that you reference, that has been on fire, it was soft, what’s going on there and what’s your strategy for – to get it going again?

[Charles Sykes:]

Well, it’s going, it’s – if you look at the nature of the industries and it’s one of the reasons why it’s so important once you get to a certain size in the space that have good diversification of your verticals because it is a bit lumpy as we say and it’s still true in our business. You’ll have these periods a growth then you kind of cool off, you wait, you get your next win, you got to ramp that next win in technology maybe with one of them what we call the new tech companies or maybe the volume today isn’t that great but in the future it will be great. So it’s just the ups and flows that who you’re winning, the type of company that you’re winning but really across all verticals, even with the communication vertical mathematically showing the decline they’re all growing really in the sense of opportunities for us that we see. So I wouldn’t be too concerned with it, I think it’s good that we have that mix balance portfolio, it helps us to keep getting the overall company growing.

[William Warmington:]

Okay. All right, well thank you very much.

[Charles Sykes:]

Thank you.

[John Chapman:]

Thanks, Bill.

[Operator:]

Our next question comes from Steve McManus of Sidoti & Company. Please go ahead.

[Steve McManus:]

Hey guys, and thanks for taking my questions. First what I have, it seems that productivity gains were one of the major reasons for that to be, I mean how sustainable is that when looking at the margin profile next couple of quarters, I mean any commentary there would be great.

[Charles Sykes:]

Yeah, just given our current mix of business, mix meaning geographically how it’s distributed across all the countries that we operate in, that – it’s at a good steady level, I mean when you run in 35.9% plus given that mix we’re in there. So I mean I think when you say it’s sustainable it should be just – it should run in that zone, now you’ll have the ramps that will still mix that up a little because when – lot of times when we’re training and adding agents sometimes we’re paid for that, sometimes we’re paid for that at a lower rate, sometimes we’re not paid for it, it depends what terms we can negotiate. So that will manifest itself in those gross margins. In general, that 35% range and running in there that’s in the zone for us and so we’re there. Recall, when we were caught out so much on agent productivity before, the company was running a little under 33% and we just had a big focus on that in just getting some things in place, so everybody has done a great job with it. This time it was good because it was just at 35.9%, it was – it did a really, really nice job with timing of events, but it’s sustainable, just playing old fashion operations.

[Steve McManus:]

Okay, great, that’s very helpful. And then looking at pricing and it’s been pretty stable in the core outsource business, what do you guys seeing with respect to Clear Link’s markets in terms of pricing?

[Charles Sykes:]

Pricing there is – I mean as far as I’ve comment just on in general sense, and we’ll be able to talk more about this as we get into the details on it. But I would say it’s stable too, I mean everything is somewhat evolving if you will as we get into these new channels, new capabilities but nothing changes to the extent that the margin profile with enough changing. And remember too, when you guys think about Clear Link, it’s a different business model, it’s not the kind of model where we operate today where we go to a client and then they say, hey we have 500 people that were operating today and we want to give them to you. I mean their model is, hey we want to use you guys to extend the reach, marketing reach and demand generation capabilities of our product or service and we want to give you a territory. So when they go into it, they then use their digital demand strategies and they’ll lead to conversion capabilities and everything to extend the reach [indiscernible], but in that sense you don’t know defendably that you have 500 people, it’s more a matter of what can we get out of the market of the West Coast of United States of the Southeast of the United States or things like that. So it’s a little different in that regard when you’re trying to get predictability in the brands, I mean in the demand. But the pricing and everything is filling stable as well, in fact, marketing is the way so many companies today are driving their valuations seems to be the driver in the majority of business models today than what’s happening out there.

[Steve McManus:]

Okay, great. Thanks a lot guys, I appreciate it.

[Charles Sykes:]

Thanks.

[Operator:]

Our next question comes from Frank Atkins of SunTrust. Please go ahead.

[Frank Atkins:]

Thanks for taking my question. I wanted to ask a little bit about seasonality going in the 2Q, if you could maybe give us some color there and perhaps break it down Americas versus EMEA?

[John Chapman:]

Well, we don’t like start guiding by segment Frank, but yeah, I mean clearly – let me try and break that in Q1 because I think that will help you. In terms of Q1 year-over-year we’re down 20 basis points and I think we said ramp was about 110. And Chuck mentioned there, we had investments in the RP, with [indiscernible] and various other vertical market and investments they were 30 basis points. So we actually year-over-year are core [indiscernible] with about 120 basis points improvement year-over-year if we exclude those [indiscernible]. In terms of Q2, we are showing 110 basis point reductions. The ramp impact in Q2 is probably going to be 110, 107 basis points somewhere in there. We do have a bigger head when – on the [indiscernible] in the vertical market in Q2 that’s - we expect that to be about 60 basis points. So unlike Q1 actually year-over-year that core was up a 120, we probably only looking at core improving 70 to 90 best as last year, so it’s still a real nice move for absence and those kind of headwinds on the ramp and headwinds on the ERP. And hopefully that kind of gives you a little bit more color as to what’s happening year-over-year between quarters.

[Frank Atkins:]

Okay, thank you that’s helpful. I wanted to ask a little bit about the strategy side of Clear Link, what role does that have if any in terms of vendor consolidation positioning and pricing going forward?

[Charles Sykes:]

Yeah, Frank what I would look at is, when we think about – we keep using the term that we’re seeing the convergence that’s taking place out there and marketing sells and support. And reason for that is I mean just everybody on the phone just think about it when you have an issue, how many times do you go to the website first or pick up your mobile phone before you even speak to any representative. And that convergence is what’s making it where companies are really wanting to leverage that new customer journey that customer journey being digital. So if you look at, first thing that we think will take place is that you’re going to be seeing a lot of these larger organizations, you’re going to see the new role created Chief Customer Officer, it’s already taken place but I think you’re going to see that growing more significant. And the reason why because when you go out to a website today and you’re using a self-serve tool, for any client, I can tell you today that for most of those companies, particularly the large ones, probably the IT group created it, maybe the chief marketing office or maybe the head of support and lot of the companies now realized and they need to bring that together so that the brand experience is aligned, and that’s where this new role chief customer officer is taken place. So when you’re thinking of the consolidation, if we separated the way we are today we still see consolidation in the customer support side of the house taking place, particularly for those companies that are using more than three providers. Lot of the companies today continue to try to wish before they can get down to a small few number of providers, now as they look at who they want to partner with, we of course, are placing a bet that we believe they’re going to warn companies that not only have certain size and scale and capability, just like we have to compete today, but companies that can help them digital transform their customer service strategies. Bring that convergence together, participate in that, and that’s why – that’s where the Clear Link into us we think it’s going to help us in creating that differentiation. So, in our traditional business, consolidation is still taking place, companies are trying to get down to just a few – and our key – a few, because not many of them will go single source. You’ve been getting down to two is we’re seeing that but a lot of them three is about the limit that I would say. And then that next wave to me, I think they’re going to look for companies that have broader capability for that whole customer journey, that’s going to be the next wave we believe in our industry, it’s going to be really important.

[Frank Atkins:]

And if I could just break one more, you mentioned a couple of times in the call and I wanted to see if I could get a quick update on the virtual capabilities where they stand now and what you’re seeing in that space?

[Charles Sykes:]

Yeah, the virtual capability – I know every time we do a program a lot of time there is a temptation, people want us to kind of report on that separately. But to think about the virtual, virtual is working really nice for us, and just being part of our overall aggregated delivery platform. So, a great example of that, the one that I was calling out the communication client, so much of the virtual program is really about the human capital strategy side of our clients. And as we much as we want to talk about a lot of the things around the social media and these digital channels, many, many, many, many times what it really gets down to is our clients are saying, oh my gosh, I need a 1,000 people in a matter of months very, very quick. And virtual for us is just, it’s unmatched in its ability to ramp, I mean it can ramp speeds seven times faster than brick-and-mortar. Unless you’re sitting there with 50% capacity utilization and you got a bunch of empty seats, which we’re not trying to do. So it’s a great program for that. And sometimes it will be short live, because sometimes the clients may say, look I eventually would like to have them in the brick-and-mortar center or I may eventually want to get it to where I’m going to shift at offshore or something but right now I have a big demand. And that’s not a problem for us because we can ramp it up and ramp it down so much easier than we can’t do our facilities, but the key thing for us is that it was a differentiator that allowed us to win the deal and to build the relationship. So we think it’s going to also play a role for us in the healthcare side because again, more and more of these new capabilities that are being launched in the healthcare area, really come down to around the human capital strategy that who is going to be on the phone, whether it’s a psychologist or if its’ a care coach or someone around specialists and they could be travel reservation if you’re getting to different industries, that’s where the competition for human capital we’re going to see the virtual model playing out. But it isn’t the kind of thing that we really wouldn’t want to break out on any more than we really report on our financials about North America or reports leaving offshores. It’s just all part of our capability that creates differentiation. And I think we’re starting to see it really make a difference in the market place for us when we are presenting that capabilities.

[Frank Atkins:]

All right, great. Thank you very much.

[Charles Sykes:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Charles Sykes:]

All right. Well thank you, ma’am and thank you everyone as always for your questions and we look forward to updating you guys on our next quarter. Everybody, have a good day.

[Operator:]

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