Sykes Enterprises, Incorporated
Q3 2016 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Good morning and welcome to the Sykes Enterprises’ Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Management has asked me to relay to you that certain statements made during the course of this call, as it 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 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.

[Chuck Sykes:]

Thank you, Carrie, and good morning everyone and thank you for joining us today to discuss Sykes Enterprises’ third 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 third quarter results and talk broadly about the State of the Industry. After which I will turn the call over to John and then we will open it up for Q&A. Turning to our financial results, in the third quarter, we delivered revenue growth of 21.3%. Non-GAAP revenue growth that’s adjust for Clearlink and foreign exchange fluctuations was up a solid 7.9%. This was the highest third quarter non-GAAP gross number in over 12 quarters. Demand was broad based with growth coming from both new and existing clients. In fact growth from our largest client, excluding Clearlink rebounded sharply up roughly 11% on a comparable basis. This comes after four straight quarters of decline after a program expiration last year. But we are still client concentration among our top 10 clients remain roughly unchanged, when stripping our Clearlink underscoring the breadth of growth across our client portfolio. Operating margins remained unchanged at 7.7% comparably. On a non-GAAP basis they came in at 8.5% better than what was implied in our forecast owing the better agent productivity and better expense management. As we discussed last quarter ongoing ramp expenses and operational inefficiencies continued to weigh our margins. And finally, we sustained our healthy balance sheet ending the quarter in the net cash position while maintaining high levels of reinvestment in our business, both for current expansion and future renovation. All in all we delivered respectable results for the quarter, demonstrating our ability to navigate through the challenges, I’ll taking a long-term view of the business. Now I’d like to offer some perspectives on State of the Industry, in particular, I would like to touch on the demand drivers. Given the breadth of our client portfolio, which spans Global 2000 companies of several vertical markets. We continue to gain interesting insights into strategic and secular forces that continue to shape our client’s thinking around outsourcing. Strategically speaking, understanding the customer journey and driving an upper list customer experience to maximize and monetize customer loyalty is front and center of the minds for our clients. But we have spoken at length about the strategic angle on various occasions. There are also other incremental drivers worth highlighting that are further tipping the scales for the outsourcing. These appear to be more secular nature. Specifically they’ve revolve around managing large pools of distributed workforce, amid rising labor cost and increase labor regulation, whether it is banking, telecom, technology retail, healthcare. The convergence of all these factors is pressuring clients in each of these industries in different ways. And the outcome is a greater recognition of the benefits of outsource in not just reducing current costs, but also reducing future costs through their greater flexibility. So in closing the underlying demand fundamentals remain strong. And our client relationships are on good putting. Thanks for our differentiated business platform, which integrates capabilities from Clearlink, Alpine, and Qelp, we can deploy comprehensive suite of customer lifecycle management offerings that advances our clients brand, while providing operational flexibility. That suite includes everything from digital marketing and demand generations, customer service whether live agent or self-service. All the way through retention and soft collections both on the foundation but leverages data analytics through main expertise on our comprehensive delivery model. And the validation is in the results, we are capturing or share of the opportunities there’s the shift from in-house and vendor consolidation continues, which can be seen in the growth across the breadth verticals. In short, we are benefiting from the investments we have made and we are taking the right actions that are in the long-term interests of our business and shareholders. We remain committed to our 8% to 10% operating margin target, even though we will not be in that range this year due to the heavy capacity expansion ahead of revenue growth. The operational headwinds, we have discussed with past and we will continue to move ahead, thanks to our solid positioning. 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 comment on the third quarter results, particularly key P&L, cash flow and balance sheet highlights, after which I’ll come to the business outlook for the fourth and full year 2016. From a revenue perspective, we came in at $385.7 million, that’s the midpoint of the business outlook range of $389 million. Roughly $3 million in the revenue delta, which principally driven operational inefficiencies given a handful of clients within the communications and financial services vertical, I’d discussed in our August 2016 business outlook. On our year-over-year comparable basis, revenues were up 21.3% on a reported basis, and up 7.9% on a constant currency organic basis in the third quarter of 2016. By vertical markets, on an organic constant currency basis, year-over-year growth was fairly broad based spanning almost all verticals. Transportation was up almost 15%, communications was up roughly 12%, financial services up almost 11%, healthcare and technology was up around 1% to 2% and the other vertical which includes retail was up around 1%. Third quarter 2016 operational margin remained unchanged at 7.7% in a comparable basis versus last year. Third quarter 2016 operating margin reflect approximately 70 basis points of favorable adjustment related to contingent consideration associated largely with the acquisition of Qelp. This favorable adjustment was calculated by taking a difference in the net present value of the consideration on accreted interest minus the projected payout. On a non-GAAP basis which excludes the contingent consideration adjustment, third quarter 2016 operating margin was 8.5% versus 8.9% in the same period last year with the delta driven partly by costs associated with capacity additions and the corresponding program ramps coupled with operational inefficiencies after resulting from the speedy pace of ramps which we highlighted in our August 2016 business outlook. Third quarter 2016 diluted earnings per share were $0.50 versus $0.48 in the comparable quarter last year, with the increase due to a combination of factors, including higher comparable revenues resulting partially from the acquisition of Clearlink, the contingent consideration adjustment and lower other expenses, all of which were partially offset by costs associated with higher levels of comparable capacity additions and ramps, and a higher tax rate versus the year-ago period. On a non-GAAP basis, third quarter 2016 diluted earnings per share were $0.55 versus $0.54 in the same period last year with the increase related largely above mentioned factors. Third quarter 2016 diluted earnings per share, however, were higher relative to the Company’s August 2016 business outlook range of $0.46 to $0.50, versus the top end of the range of $0.50 to $0.05 outperformance, which driven by disciplined expense management, which is around $0.03 per share as well as lower interest and other expenses of $0.02 per share. Turning to your client mix for a moment, on a consolidated basis, our top 10 clients represented approximately 50% of total revenues during the third quarter of 2016, up a tick from the year ago period due to the inclusion of Clearlink’s revenues, which is seasonally stronger than the third quarter. Absent Clearlink, the concentration of our top 10 clients we got combined fractionally in third quarter of 2016 versus year-ago period due to broad-based growth. We continue to have only one 10% plus client. Our largest client, AT&T, which represents multiple distinct contracts including the demand generation business from Clearlink represented 17.1% of revenues in the third quarter of 2016, up from 16% in the year ago period. Even excluding Clearlink, AT&T’s revenue growth rebounded up double digits, as projected at the start of 2016. Our second largest client, which is in the financial services vertical, represented 5.9% of revenues in the third quarter of 2016 versus 5.2% in the same period last year. The growth in the financial services vertical 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 third quarter was up slightly with $38.7 million from $37.8 million with the modest increase due mostly to working capital swing factors including the growth in accounts receivable was driven by growth and overall revenues. During the quarter, capital expenditures were $24.9 million, an increase of almost 50% in the comparable basis due to strong underlying growth. Our balance sheet at September 30 remained strong, with cash and cash equivalents of $283.3 million, of which approximately 89.6%, or $254 million, was held in international operations. At quarter end, we had $272 million in borrowings outstanding with $160 million available under our $440 million credit facility. We continue to hedge some of our foreign exchange exposure for the fourth quarter and full year were hedged approximately 82% and 77% at weighted average rates of 47.6 and 47.11 Philippine Peso to U.S. dollar respectively. In addition our Costa Rican colón exposure for the fourth quarter and full year is hedged approximately 32% and 39% at a weighted average rate of 544.64 and 546.75 colón to the U.S. dollar respectively. Receivables were at $313.7 million. Trade DSOs on a consolidated basis for the third quarter were 74 days, down one day sequentially and down three days comparably. The DSO was split between 72 days for the Americas and 79 days for EMEA. Depreciation and amortization totaled $18.2 million for the third quarter. Now let’s review some seat count and capacity utilization metrics. On a consolidated basis, we ended third quarter with approximately 47,400 seats, up roughly 6,300 seats comparably and up 1,700 seats sequentially. Included in the third quarter seat count are 1,400 seats associated with Clearlink. Year-over-year comparable and sequential seat increases excluding Clearlink reflect capacity additions for higher projected demand. The third quarter seat count can be further broken down to 40,900 in the Americas and 6,500 in EMEA. Capacity utilization rates at the end of the third quarter were 75% for the Americas region and 78% for the EMEA region, versus 78% for Americas and 85% for EMEA in year-ago quarter. The decrease in the Americas utilization was driven by capacity additions by higher projected demand, while the decline in EMEA utilization was due to a combination of program equations lower demand and exit from a highly utilized facility. The capacity utilization rate on a combined basis was 75% versus 80% in the prior year ago period, with a decline due to capacity additions for higher projected demand. Now let’s turn to business outlook. The overall demand trajectory across most of our vertical markets still remained healthy. This demand is being driven by growth with both new and existing clients across the Americas in the near regions. We’re however revising our business outlook to reflect the ongoing impact of operational factors discussed in the August 2016 financial press release. These factors are attributable to handful of clients and stem from the speedy piece of sizeable ramps, the over-delivery of volume amid those ramps and client-driven program changes, all of which are leading to workforce challenges, including staffing inefficiencies. We are put into effect various action plans, ranging from increasing agent support ratios to performance based wage adjustments where practicable, and expects to have these clients operating at more normalized levels by the second half of 2017. We expect these operational factors to impact the full year 2016 revenue range by approximately $11 million resulting in a slight reduction in diluted earnings per share relative to the business outlook provided in August 2016. Despite the revision in the revenue range, we still project to deliver solid revenue growth for 2016 over 2015. Second, we added roughly 1,800 seats on a gross basis in the third quarter, with the year-to-date seats additions as of September totaling 6,300. The total seats planned for the full year are expected to be around 6,900. We plan to add another 600 in gross seats in the fourth quarter. We have a plan to rationalize around 1,800 seats in 2016, of which roughly 1,400 have already been rationalized. We anticipate a net seat count increase of approximately 5,100 in 2016 versus 2015. Third, our revenues and earnings per share assumptions for the fourth quarter and full year 2016 are based on foreign exchange rates as of October 2016. Therefore, continued volatility in foreign exchange rates between the U.S. dollar and the functional currencies of the markets we serves could have a further impact, positive or negative, on revenues in the GAAP and non-GAAP earnings per share relative to the business outlook for the fourth quarter and full year as discussed above. And finally, we anticipate total other interest income expense, net of approximately $1.5 million for the fourth quarter and $2.4 million for the full year. The full year 2016 amount include the accretion of the contingent consideration of approximately $800,000. The amount in other interest income expense, however, excludes the potential impact of any future foreign exchange gains or losses. The assumptions driving the business outlook for the fourth quarter and full-year 2016 are as follows. Considering the above factors we anticipate the following financial results for the three months ended December 31, 2016. Revenues in the range of $389 million to $394 million; an effective tax rate of 27%; on a non-GAAP basis, an effective tax rate of approximately 29%; fully diluted share count of approximately $42.2 million; diluted earnings per share of approximately $0.39 to $0.42; our non-GAAP diluted earnings per share in the range of $0.48 to $0.51; and capital expenditures in the range of $16 million to $21 million. For the 12 months ended December 31, 2016, we anticipate the following financial results. Revenues in the range of $1.46 billion to $1.465 billion; an effective tax rate of approximately 28%; on a non-GAAP basis, an effective tax rate of 30%; fully diluted share count of approximately $42.3 million; diluted earnings per share of approximately $1.45 to $1.48; non-GAAP diluted earnings per share in the range of $1.79 to $1.82; and capital expenditures in the range of $75 million to $80 million. And with that, I’d like to open the call for questions. Operator?

[Operator:]

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

[Mike Malouf:]

Hey, thanks guys for taking my questions. Can I just start off, Chuck, maybe if you could talk a little bit more about these operational challenges that you’re facing. I know that on the August call, you talked a little bit about this. But it looks like either they’ve become more than you thought, or you are finding them more difficult to overcome. And I’m just wondering, can you talk a little bit about what you’ve done so far to address these? And maybe some insight in particularly what you’ve found out since the August call with regards to some of the details surrounding them. Thanks.

[Chuck Sykes:]

Yes, sure thing, Mike. I’ll try to do it succinctly, and so in a way that everybody can just stay with it, and not throw tons of numbers out here. If you go back – the things in the ramp that we were doing – last time we had talked about how we were expanding our gross seat additions by 60% of our capacity, which is quite significant for us. And a big portion of that was very focused in the United States. Now, within the United States, where we thought we were going to be in terms of the number of full-time equivalent productive people generating revenue for us at this time is 1,000 people less than what we thought – or we were talking about last time when we were on the call. Now, the question is, out of that 1,000 people, about 90% of that relates solely to these new programs in these new sites. And people may be asking, well, why is it contained to just those new sites? It’s not contained just to those sites, but it is a big portion. And the big reason for that is that when you are adding a new program, and particularly in the United States – unlike offshore locations where typically we’ll build one big center that’s housing 3,500 people – here, we are in six different locations, and you have unique labor challenges that you are going to have in each one of those markets. Now, what’s going on right now in these programs is that a couple of them have been really delivering very, very high levels of volume to us. And so people may be saying, well, isn’t that good? Normally it is; except when you’re in an early stage of ramping a program with individuals that haven’t had time to really build their proficiency – in many cases, it takes six months for someone to feel comfortable in handling a transaction. When you are hiring people and you’re putting them on out the floor – and it’s a very stressful environment, with high volumes, long queue times – it just begins to build on itself, and you result in having high turnover. So, that’s where we have led to on the 1,000 people short, to keep it simple. We’re seeing two things that are taking place. We are seeing an increase of turnover, over and above what we priced the deals at and what we thought in the forecast. We’re also seeing – if we’re not getting people quitting or turnover, we’re seeing absenteeism occur. And that’s what’s keeping us from being able to get to the 1,000. So now the question comes out, well, why is that occurring? And I alluded to one of the things, talking about volume. But when we look at this, I call it personally the three Cs. Now, understanding why people quit jobs, or don’t show up in absenteeism, is well known to be complicated. And I think we can pretty much average it – boil it down to these three things. You have to look at your compensation. You have to look at the content of the work. And by that I mean if the content of the work we did as a Company was heavy-duty, outbound telemarketing, that would have a higher associated turnover. That’s not what we’re doing, but I’m only giving that as an illustration when we think about content. And the other is the context. What environment are you asking people to perform this work at this compensation level? And that’s where the volume amount comes into play. So, for us, we think it’s more related – and normally when you get into this – this is not a unique situation. Like anyone in operations, these things will occur at any given location from time to time. Our natural instincts is to focus on our internal behaviors

[Mike Malouf:]

That’s a lot of color, and I appreciate that. Just a quick follow-up on that. You’ve obviously been in this business for a while and seen these types of situations throughout Sykes’ history. And I’m just wondering if you could – can you give us any sort of insight; is there anything different or new to these particular operational challenges that you face? Or within – maybe it’s the economy. Maybe it’s the geography. Something is – is this something that you think you can overcome by the timeline that you laid out? Or is there something new here that perhaps is a new challenge that you are trying to overcome?

[Chuck Sykes:]

Mike, it’s a very fair question. And fair question. And it’s one that obviously we look at, because we’re dealing with really the single-most important value driver in our business, and that’s our folks. But I would say that the difference that we are seeing is definitely just in the magnitude of the turnover and the absenteeism. Interestingly – and you guys on the phone call here deal with a lot of folks in the industry. And when you look at the service side, it does seem to me that there is something that is changing in the labor demographic in the United States. Now, the question is why? And does it have to do with the wage levels, or is there something else going on? We don’t have 100% visibility into that. We really can only focus on the things that we feel are controllables, which is a lot of the operational disciplines. That’s another reason why the numbers are where they are, because we are, in some of these locations, doubling down and giving folks strong levels of floor support, particularly where we’re getting these high levels of volumes. That does cost money. It’s not something we need to do forever, but we’re just trying to do it right now in this short-term side. But I do believe we may be at a point in the United States – and we’ve been talking about this probably for almost the past three phone calls – around the wage inflection. But we may be at a point that we’re seeing that wage inflection. Now, the bad news for us – and just being as transparent as you can be in looking at it – would be if suddenly customers just said, well, so what? We’re not going to work with you, or anything in your pricing or anything. I do not believe that is the reaction that we would get, because they have to have folks showing up for work. We have to deliver this service. And the other thing is that it’s not unique to us. You are already seeing some of our client, target clients on their own accord, making adjustments and things to wages. What it does leave for us – so what are the paths I follow from here? In the one customer that we just recently have engaged with on it, they responded by increasing our bill rate. Obviously that would be the best path that we would get. The other is that we do believe we may see a more – a bigger uptick interest now in some of the home agent programs, where we have a little more flexibility of being able to respond to various actions taken by various states, if they suddenly want to move up quickly on minimum wages and those types of things. And you may see a bigger interest in people wanting to look at things about offshore. And the good news is that we have a comprehensive delivery footprint so we can meet all of those needs. But the bad thing would be, in that case, is that it would involve more change. I would say today that if I were having to pick the path I think we’re going to be on, I think most of our clients are going to want to be committed to remaining for these programs with domestic delivery. And some of them will be able to, in their budgets, to work with us and move pricing. Others, it may take a little bit of internal conversation. But I think, in the end, they will see it, because it’s fact-based. It’s not operational incompetence on our part, and I think they will respond accordingly. So, I can’t give you definitive things in trying to pick this stuff out. But I just – the spirit of transparency, trying to speak openly with you. It’s the path we see.

[Mike Malouf:]

No, I think that’s very helpful. Thanks a lot. Appreciate it.

[Operator:]

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

[Vincent Colicchio:]

Chuck, I’m curious

[Chuck Sykes:]

Yes, it’s a good question, particularly that second part on – is it related to the industry they’re in? The home agent program, for us, one of the things we loved about it is that we felt it would make other parts of the market, particularly in the United States, more addressable to us. Retail and hospitality have been an area that have been big users of it for quite a while. Some of these programs that we’re speaking of here, with these new sites, did fall into our financial services side. You’ll see that in our growth numbers and changes. Financial services is not as quick going to jump on the home agent platform. And I’m speaking slowly there, because that is as it relates to certain customer interaction types. We are beginning now to see some of our financial clients exploring that more seriously. And we think that they may be open to letting us handle more basic, generic, customer service transactions. I think it will be a while before they let us handle fraud calls; things such as that related in home agent side. But in the other industries, we are, and we do believe we’re seeing more interest in tick. What’s interesting is we’re seeing now the healthcare space beginning to take more interest in our home agent platform. And prior to this call, I would say that healthcare was like financial services; that they were ones that they were a little hesitant about it because of HIPAA. But again, I think this background – and maybe what we’re alluding to here is, in fact, we are at an inflection point in the labor market. I think you are going to see people wanting to be more comfortable in betting on home agents where the entire United States is our labor market, versus placing a bet in one specific town in America. So, anyway, I think as time goes on, we’re using it to our advantage right now as best as we can for markets that are going to be able to use it. And it’s just like us investing in off-shoring. Our focus is just making sure we have a comprehensive platform that can meet all of the unique needs of our clients. It’s never been that we favor one over the other. We’re just trying to meet the new world of work, and all the new demands and things that are going to be evolving out there.

[Vincent Colicchio:]

Thanks for that. And then one last question. Healthcare and technology lagged other verticals. Any sense for when that may pick up?

[Chuck Sykes:]

Yes, the healthcare vertical, for us, has been slower for us on the uptick. And I would say the reason for that for us has just been on the share of pension. We’ve been growing and having quite a bit of success in our communication and on the financial services side. And when you look at just the capacity, how much you can absorb this growth, there is, in this business – there is somewhat of a typical limit. When you are doing 16% growth on your seat additions, it can create some challenges inside, particularly if it gets concentrated in a geography. So I think we’ve just, through our own actions, have still been focused a lot on those big core – the finance, technology, and communication. But technology we are seeing some good wins there, particularly with some of the – I think [indiscernible] kind of the new age technology companies, if you will. We do have some folks in there, too, that are technology, that are going through some of their own challenges and adjusting to the new world here. So all of that is mixed in there. Sometimes, for you guys on the outside, it may look like we are not growing, but it could just be with a lot of shifting and things that’s happening within that base. We’re excited about the things that we’re seeing in the technology vertical. And I do believe healthcare is definitely still a growth opportunity for us, but it has been a little bit of a laggard for us. And we’re getting honed in on the part we want to attack. I think with our Clearlink capabilities, we’re going to see that – we’re going to be able to accelerate that eventually. But that’s a fair observation.

[Vincent Colicchio:]

Thanks, Chuck.

[Chuck Sykes:]

Yes, thank you.

[Operator:]

Next question comes from Frank Atkins of SunTrust. Please go ahead.

[Frank Atkins:]

Thanks so much for taking my question. Wanted to ask a little bit about EMEA. What do you see as that trajectory and the demand environment? And maybe you could remind us of seasonality going into 4Q.

[Chuck Sykes:]

Yes. John, do you want to maybe take that one?

[John Chapman:]

Yes. In terms of seasonality, again, seasonality changes between Sykes and Clearlink. In terms of Clearlink we’ve just seen their best quarter of the year. And in fact, unlike Sykes, where probably quarter four is our second best quarter, or should be, absent these ramp pushes. And Clearlink’s strength is quarter three; then it is probably quarter one, then four. But in terms of the entire business, you’re probably looking at Q2 being both ours and Clearlink’s weakest quarter. In terms of EMEA – and again, Chuck spoke about there where we had a few technology clients that have been reducing VR. We have had a few challenges in one client, in particular in EMEA, where we’ve been looking at whether we want to maintain business with them. And hem and that lackluster EMEA number is a reduction in one of those helpful clients. In terms of new clients, we’ve had our fair share of good wins; also some nice new logos, and we feel really positive about what’s in there, as this relatively significant client where it’s probably not – I’ve not looked at the numbers, but probably not 3 or 4 points at the draw just because of that relationship. But we are looking to exit sometime during first half of next year.

[Frank Atkins:]

Okay, great. And if I could I ask real quickly, do you have any additional color on the gain on contingent consideration?

[John Chapman:]

All it is we booked an estimate of what we felt we were going to be paying out at the end of three years. The earn-out was based on a combination of factors

[Frank Atkins:]

Okay. And last one for me. If you look at the capacity utilization in Americas, it’s being driven by some of the factors you’ve been talking about. But looking forward, where do you expect that to stabilize in terms of this ramp? And what margin implications does that have?

[John Chapman:]

Well, in terms of the margin implications, if you think about the whole year, we would normally see that if we are growing at, globally, 5% to 6%, we would normally see there’s a headwind all the time in our business of 30 to 40 basis points. If you look at this year, we’ve probably seen 110, 120 basis points. So if you look at the implications of where we should be, how do we operate this as we kind of model that, we’d have probably been setting 70, 80 basis points for the year higher. So that takes us into the 8.4%, 8.5% kind of adjusted operating margin number. That’s what I would say is the impact of the issues with card. In terms of occupancy – or utilization, I think Chuck said there, we’re 1,000 people short. If you’ll actually add that into the numbers, we would basically be at unchanged utilization year-over-year in the Americas. It would add 3 points to the number. So in terms of utilization, the probably 4 points, hopefully, once we get out of this. And in terms of operating margin for next year, we should be looking at – getting this behind us, we should be looking at 70 to 80 basis points for an improvement.

[Frank Atkins:]

All right, great. That’s very helpful. Thank you.

[John Chapman:]

Thank you.

[Operator:]

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

[Bill DiJohnson:]

Hey, guys, this is Bill DiJohnson on for Bill Warmington.

[John Chapman:]

Hey, Bill.

[Bill DiJohnson:]

I have a few questions for you. Clearlink was a very strong this quarter, and its contribution was a lot larger than we expected. Can you talk about its organic growth rate and what’s driving the strength there?

[John Chapman:]

In terms of the growth rate, I think it’s probably just over 40%. And in terms of much of that growth is in home services. We did make a few small acquisitions last year, so in terms of their organic growth it’s probably 80% of that number. They’ve been growing heavily in the home services, as I’ve said. And they are starting to grow in the insurance vertical. So we are not that surprised by the number. It’s what we had expected. It’s what we used when we made the acquisition. We don’t see it continuing at the 30%. We’ve always said this is a double-digit growth business with superior operating margins. That’s not changed. Although clearly it’s more accretive on the revenue side than you guys have anticipated based on what we’ve always said, which is that we expect a longer-term double-digit revenue growth number. In terms of accretion, in Q3, if you look on a GAAP basis, it’s probably $0.06. In terms of non-GAAP, it’s probably $0.09 when you include the interest charge for the debt that we took on, on making the acquisition. And for the year, it’s short of unchanged. On a GAAP basis, there’s really no accretion dilution if you include deal cost, interest; it’s basically flat in terms of Clearlink for the year. But in terms of non-GAAP, you’d take out intangibles and the deal costs, et cetera; we’re looking about $0.15 for the year. And in terms of operating margin, that’s around 30 to 40 basis for the year, accretion.

[Bill DiJohnson:]

Okay. Thank you. And we talked a little bit about at-home agents and the opportunity there, but agent growth has been somewhat inconsistent to date. And I was just wondering if you guys are still thinking you can grow that 3 to 4 times the rate of growth of brick-and-mortar agents.

[Chuck Sykes:]

Yes. I would say, just on a long-term basis – remember, again, our view of the world is that we believe, out of all of the folks that work in the United States in our industry – which is somewhere around 3.5 million people, I think, by the last industry regs I’ve been taking a look at – about one-third of those ended up going outside the U.S. We believe the remaining two-thirds, about one-third of those, over time, will end up working virtual. And I probably shouldn’t say virtual, because in today’s time that means more technology-driven virtual. So, I still use that term – I’ll have to get it corrected – but it’s home agents. We think one-third will be working home agent. We did have – for the first two years after we did the Alpine transaction in 2012, we were really rocking and rolling, right on the trajectory of how we had modeled it. We did have a little bit of a setback with one of our large relationships that had embraced it in a pretty big way. And it just had to do – nothing with the program itself. It had to do with just some issues around their concerns around fraud. The cyber security commentary does affect people’s perceptions; just like from time to time we’ve had events that have caused people’s perceptions of off-shoring to be delayed. But home agent is not really immune to that; but we already believe we’re over that. In fact, we’re ramping a program in addition to the brick and mortar, new sites. All of those seats have pretty much been replaced going through with the ramping. And we believe that now, and particularly maybe against the backdrop of labor, we’re going to see a little more of an uptick again in the interest with it. So, absent any of these concerns of things that do emerge from time to time that we can’t always predict, I would say we still have a good feeling that we are going to see the pace of growth there on a more steady-state basis, being stronger than the brick-and-mortar side. I’d say that’s still true.

[Bill DiJohnson:]

Got it. All right. Thank you, guys. That’s it for me.

[Chuck Sykes:]

Thanks.

[Operator:]

The next question comes from Shlomo Rosenbaum of Stifel. Please go ahead.

[Adam Parrington:]

Hi, this is Adam on for Shlomo. Is there – do you guys have a view to the pattern of improvement? In other words, can you walk through how the various factors should come together in 2017 in terms of the pattern of revenue and EPS, improvement in the ramp-ups, and the seasonality in general?

[John Chapman:]

First of all, we don’t want to guide into 2017, obviously. And I would expect 2017 is going to have the same seasonality that we’ve described above in terms of where Clearlink’s strength is and where Sykes’s strength is. In terms of the improvement from here, we’ve really projected that we won’t really see a significant – I mean, you can see the numbers. We’ve taken down by $11 million to $12 million. You can see we are forecasting – let’s call it, tread water in Q4. Because remember, we’ve got higher attrition in these programs. And we are getting, even when we’ve got FTEs, we’re probably running at 20% less hours per head than we thought we would in these programs. And so we are forecasting most of those issues to be with us from Q4. As Chuck mentioned, we have had some wage adjustments and billing adjustments only in the last 30 days. We might see faster traction there; we might not. We are just going to be waiting and seeing what that looks like. But we do believe that it will be, if you can imagine, from let’s call it mid to late Q4, the improvement should be relatively on a straight-line basis. It’s not going to be any step function change. We are short of 1,000 people. We just need to keep, obviously, working on the factors to reduce attrition; work on the factors to get more hours out of the FTEs we’ve got. And we should see these programs get healthy and hitting their target margins, if you like, by the second half of the year. So that’s all the color I can give to you, is that you won’t see a fundamental step function at any point. We have had some changes. We have had various changes in various programs. And we’ll be viewing them over Q4, and then obviously adjusting our numbers and giving guidance when we give Q4 numbers in February-March.

[Adam Parrington:]

Great. All my other questions have been answered. Thank you.

[John Chapman:]

Thanks.

[Chuck Sykes:]

Thanks, Adam.

[Operator:]

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

[Dave Koning:]

Yes, okay, thanks guys. My question – it’s a little bit along the same lines, because we’ve had a few quarters in a row now where margins have come down a little bit year-over-year, and for all the explainable reasons; and then Q4, obviously, a little more of that. And it sounds like no step function, but maybe when – what quarter do you think you start to get back to margin expansion year-over-year again? Will it be early in this year? Or are you really saying to think of margins being maybe stable to down in the first half of next year, but then really the expansion comes in the back half? Is that what you’re saying?

[John Chapman:]

Yes; although, if you remember, we had a particularly weak Q2 this year. So I would be expecting that the low that we had in Q2 this year, we would not be below that next year. But in terms of this headwind from these programs, we do see it be a headwind until towards the end of that second quarter.

[Dave Koning:]

Got you. Okay. Actually, that makes a lot of sense. And then the only other thing, as we look into next year that I was wondering

[John Chapman:]

Yes. I think you’ve probably got three, I’m afraid, as 30-something. We’ve always said, based on the business, we anticipate it will pop out around the low 30s. So I would expect next year, we will see not a significant increase, but a little increase over this year. And that will be partly – you’re absolutely right – due to Clearlink now being in the pie. So again, I would expect something in the 30s, but not anything above the low 30s.

[Dave Koning:]

Got you. Okay. And then, I guess, maybe lastly, you still have a pretty clean balance sheet. I know most of the cash is international. But now that the stock has pulled back a little bit, could you get more aggressive with buybacks?

[John Chapman:]

Yes. We’ve said we will be opportunistic with buybacks. We do – is principally just to get rid of the impact of the long-term incentive plan. But if we believe there’s an opportunity there, we would take that, yes.

[Dave Koning:]

Got you. Okay. Great. Well, thank you.

[John Chapman:]

Thanks, Dave.

[Chuck Sykes:]

Thanks, Dave.

[Operator:]

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

[Chuck Sykes:]

Thanks, Carrie; and thanks, everyone, as always, for your questions. I don’t have any closing remarks outside of just appreciate everybody’s time. And we look forward to updating you guys next quarter. So everyone have a good week. Thanks.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.