Sykes Enterprises, Incorporated
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning and welcome to the Sykes Enterprises’ Fourth Quarter 2016 Earnings Call. All participants 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 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. Please note this event is being recorded. 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, Anita, and good morning everyone and thank you for joining us today to discuss Sykes Enterprises’ fourth 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 recap of our fourth quarter results full year results and talk broadly about the State of the Industry, after which I will turn the call over to John and then we’ll open it up for Q&A. I'm pleased to report a solid fourth quarter for the year. Underlying revenue growth, operating margins and diluted earnings per share in the fourth quarter all surpassed expectations, thanks to better execution on the revenue and expense fronts, coupled with sustained operating momentum of our Clearlink acquisition. We were able to mitigate some of the impact of heavy capacity additions during the year. In fact, the strong performance in the quarter, which now constitutes 15 consecutive quarters of constant currency organic revenue growth, provided a nice finish to the year. From a full year perspective, we delivered equally respectable results. Comparable revenue growth for 2016 was 13.5%. On an organic constant currency basis, revenue growth for the full year was broad based at 5.3%, above the midpoint of our target revenue growth of 4% to 6%. Operating margins in 2016 came in at 6.3%, but were 7.9% on a non-GAAP basis. Given the 13% increase in organic sea capacity additions, the magnitude of which we have not seen in close to a decade, the non-GAAP operating margins fell slightly shy of the 8% to 10% we have been targeting for the business. To be sure, we are working through the challenges that have accompanied such a steep investment curve, and believe the actions we are taking are making a difference. Finally, we closed the year with record operating cash flow, a solid cash position and a conservative debt position. Now I'd like to discuss the current industry backdrop. Within that context, I want to touch on the supply demand dynamics. Let's take the latter first. From a demand perspective, we continue to see a healthy momentum of opportunities. Broadly speaking, the forces of competition, disruption, consolidation and service differentiation are underpinning growth in our business. These factors are influencing the way our clients think about their customer engagement strategies. Specifically, our clients are consolidating their supplier base to those trusted customer engagement providers and have the scale, domain expertise, solid execution and differentiated capabilities in order to drive an effortless customer experience and reduce operating costs. As such, we are net beneficiaries, seeing growth opportunities for our value proposition extend across the communications, financial services, technology and travel verticals. For instance within the communications vertical, competition, disruption, convergence and consolidation among telco, broadband and content providers, is driving demand for our solutions. While within the financial services vertical, there are numerous factors fueling demand. These include the rise in fraud support and the overall expansion of credit, as well as competition among incumbent global and regional retail banks and crowdfunding upstarts. Once again our solid domain expertise in the financial services vertical is playing to our strengths and helping us solidify wins. Similar dynamics also are playing out within the technology, retail and travel verticals, which is setting up 2017 for a potential acceleration in revenue growth relative to 2016. Now I’d like to share my thoughts about the supply side of the equation as it relates to the labor market. In particular I want to focus my remarks on the US in light of the significant growth we have recently experienced. Given the headline improvement in employment trends in the US where the unemployment rate has been hovering around 4.8%, there is some concern about limited slack in the labor market and wage pressures. Although there have been pockets of labor tightness in some cities and states, the broader picture across the markets in which we operate remains manageable. Still, with labor slack dictated more by local market conditions, we are having to employ monetary and non-monetary levers to optimize employee engagement. Specifically, we are adjusting strategies and tactics around talent acquisition and management with a focus on improving attrition and absenteeism. We are also employing proprietary capabilities and embedding them across our scalable delivery platform to drive process improvement. We believe these actions can drive engagement and speed to proficiency, thus meaningfully enhance agent satisfaction while sustaining the efficiency of our model. We believe some of these engagement initiatives can be self-funded through lower attrition, penalties and absenteeism, especially in cases where there are limited options for wage increase pass-throughs. All told, the supply of labor doesn't appear to have reached that tipping point where it is impacting our long term margin targets, but if the economy picks up steam rapidly and as broad spectrum of industries use wages to access labor markets, we will have to work with our clients to help them evaluate the best trade-offs between wage and price against our service strategies. Finally, given the growth backdrop, we believe the best use of our capital remains the reinvestment in our core business, both organically and inorganically. Our recent strategic acquisition of Clearlink is an illustration of how we are strengthening, innovating and differentiating the core platform. In fact, our projected business momentum in 2017 underscores that, with anticipation of a solid increase in revenue growth and strong implied operating margins. Clearlink positions us well by helping us to capitalize on the convergence we have been witnessing in our industry of marketing sales and service, which is being driven by the broader digital trends in the global economy. At the same time, we are keeping an eye on technology trends that are coming our way, from artificial intelligence to chat bots. We have embraced artificial intelligence by partnering with market leaders in the industry and are testing the efficacy of it under certain select circumstances. All the while, we are exploring opportunities that strengthen our domain expertise in certain verticals. We believe that the actions we are taking on balance will enhance our long term growth and margin profile while unlocking opportunities for our employees and value for our shareholders. 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 fourth quarter results, particularly the key P&L, cash flow and balance sheet highlights, after which I'll turn to the business outlook for the first quarter and full year 2017. From a revenue perspective, we came in at the $389.1 million for the fourth quarter. However, excluding the $4.8 million in negative foreign exchange impact, fourth quarter 2016 revenues would have come in at the top end of our business outlook range of $389 million to $394 million. On a year over year comparable basis, revenues were up 15.4% on a reported basis, and up 4.9% on a constant currency organic basis for the fourth quarter. By vertical market, on an organic constant currency basis, year over year growth was fairly broad based, spanning almost all verticals. Transportation and communications were both up almost 9%. Financial services was up roughly 8%. Technology, up almost 6%, which was partially offset by other and healthcare vertical down almost 11% and 9% respectively. Fourth quarter 2016 operating margin declined to 7.4% from 8.6% from the compatible period last year. Fourth quarter 2016 operating margin reflect again on the sale of a facility under contingent consideration adjustment, the combined impact of which was a wash. The contingent consideration reflects additional payout related to better than anticipated performance of the tuck-in acquisitions made by Clearlink prior to its acquisition by Sykes. On a non-GAAP basis, which excludes the facility sale gain on the contingent consideration adjustment, fourth quarter 2016 operating margin was 9.1% versus 9.7% in the same period last year, due to operational inefficiencies from the significant capacity additions and program ramp costs I've highlighted in our third quarter 2016 business outlook. Fourth quarter 2016 diluted earnings per share were $0.43 versus $0.48 in the compatible quarter last year, with the decrease due to a combination of factors including a higher effective tax rate, foreign currency transaction loss and previously discussed operational inefficiencies. On a non-GAAP basis, fourth quarter 2016 diluted earnings per share were $0.52 versus $0.55 in the same period last year, with the decrease related largely to the aforementioned factors. Fourth quarter 2016 diluted earnings per share adjusted for interest and other expenses and tax rate as provided in our November 2016 outlook, would have been $0.57, $0.06 above our November 2016 outlook range of $0.48 to $0.51. That $0.06 outperformance was driven by higher demand, higher region productivity and expense discipline. Turning to our client mix for a moment, on a consolidated basis, our top 10 clients represented approximately 50% of total revenues during the fourth quarter of 2016, up 2% from the year ago period, due to the inclusion of Clearlink whose key clients overlap with Sykes. Absent Clearlink, the concentration from the top 10 would have remained unchanged at 48% on a comparable basis versus the year ago period. 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 16% of revenues in the fourth quarter of 2016, down a fraction from 16.2% in the year ago period. Our second largest client, which is in the financial services vertical, represented 5.9% of revenues in the fourth quarter, unchanged from a year ago period. Now let me turn to select cash flow and balance sheet items. Net cash provided by operating activities in the fourth quarter was up 7.3% to $27.4 million from $25.6 million, with the increase due to non-cash add backs of depreciation and amortization associated with the significant capital investments and acquisition related intangibles. During the quarter, capital expenses were $19 million, an increase of 42.3% on a comparable basis. Our balance sheet at December 31, 2016 remains strong, with cash and cash equivalents of $266.7 million, of which approximately 91.4% or $243.8 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 first quarter full year, we have hedged approximately 62% and 33% at a weighted average rate of 47.64 and 48 Filipino Peso to the US dollar respectively. In addition, our Costa Rica colón exposure for the first quarter and full year, is hedged at approximately 27% and 44% at a weighted average rate of 546.52 and 555.73 colón to the US dollar. Receivables were at $318.6 million. Trade DSOS on a consolidated basis for the fourth quarter were 74 days, unchanged sequentially and down three days comparably. The DSO was split between 73 days for the Americas region and 81 days for EMEA. Depreciation and amortization totaled $18.4 million for the fourth quarter. Now let’s turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended fourth quarter with approximately 47,700 seats, up roughly 6,600 seats comparably and up 300 seats sequentially. Included in the fourth quarter seat count of 1,300 seats associated with Clearlink. Year over year comparable and sequential seat increases, even excluding Clearlink, reflect capacity additions for higher project demand. The fourth quarter seat count can be further broken down to 41,200 in the Americas region and 6,500 in EMEA. Capacity utilization rates at the end of the fourth quarter of 2016 were 74% for the Americas region and 80% EMEA, versus 79% for America and 85% 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 75% versus 79% in the year ago period, with the decline mainly due to capacity additions for the higher projected demand. Now let's turn to the business outlook. In 2017, we expect the continuation of the favorable underlying demand trends experienced in 2016. This underlying demand is driven by growth with both existing and new clients across the Americas and EMEA regions. Specifically, the main drivers of growth remain the financial services, communications and technology verticals. Full year 2017 revenue comparables are slightly skewed however by the timing of the Clearlink acquisition, which closed in the second quarter of 2016, and as a result, had only nine months of revenue contribution in 2016 versus 12 months for 2017. Revenues in 2017 also reflect approximately $25 million in unfavorable impact from foreign exchange rates relative to 2016. Given the broader macroeconomic environment and the sustained demand growth, we have seen pockets of some imbalances in labor and wage dynamics which we expect to be able to either mitigate or offset through a combination of actions, including some wage increases offset by lowered attrition, wage pass-throughs, shifts in delivery strategies and productivity. As a result of our implicit operating margin and explicit diluted earnings per share assumptions, reflects this manageable macroeconomic backdrop and operational progress related to staffing inefficiencies from previously discussed significant capacity additions and sizable program ramps in 2016. Our revenues and earnings per share assumptions for the first quarter and full year 2017 are based on foreign exchange rates as of February 27. Therefore continued volatility in foreign exchange rates between the US dollar and the functional currencies of the market we serve, could impact positive or negative, revenues and both GAAP and non-GAAP earnings per share relative to the business outlook for the first quarter and full year as discussed above. We anticipate total other interest expense net of approximately $1.5 million for the first quarter and $6 million for the full year. The amounts in the other interest income expense however exclude the potential impact of any future foreign exchange gains or losses. Finally, our full year 2017 effective tax rate is expected to be roughly in line with 2016 levels. However, the effective tax rate for the first quarter 2017 is expected be higher compared to the same period last year, with the increase driven primarily by a shift in the geographic mix of earnings to higher rate jurisdictions, driven partially by Clearlink. Considering the above factors, we anticipate the following financial results for the three months ending 31st of March 2017. Revenues in the range of $380 million to $385 million, effective tax rate of approximately 31% on a non-GAAP basis and effective tax rate of approximately 33%, fully diluted share count of approximately $42 million, diluted earnings per share of approximately $028 to $0.32, non-GAAP diluted earnings per share in the range of $0.37 to $0.41, and capital expenditures in the range of $13 million to $18 million. For the 12 months ended December 31, 2017, we anticipate the following financial results. Revenues in the range of $1.58 billion to $1.6 billion, an effective tax rate of approximately 30% on a non-GAAP basis and effective tax rate of approximately 32%, fully diluted share count of approximately 42.3 million, diluted earnings per share of approximately $1.59 to $1.71 dollars, and non-GAAP dilutes earnings per share in the range of $1.95 to $207, and capital expenditures in the range of $55 million to $65 million. And with that, I'd like to open the call up for questions. Anita?

[Operator:]

[Operator Instructions] Our first question comes from Mike Malouf with Craig Hallum Capital Group. Please go ahead.

[Mike Malouf:]

Great. Thanks guys for taking my questions. When you take a look at, the business is obviously running pretty smooth right now on the demand side and I know you're trying to navigate some of the cost pressures. And it sounds like you think wage pressures are manageable and haven't really hit yet. But can you give us some color - you've obviously done this for a while, just sort of how this - some of the early indicators that maybe wage pressures are getting ahead of you and some of the things that you're looking for and just a little bit of color on how you’re mitigating those risks. Thanks.

[Chuck Sykes:]

Yes. Mike, it’s Chuck. The conversation and everything on the wage pressure side, I think for us and just speaking first as a company, we expanded quite rapidly in the US. I mean we hadn’t seen that type of expansion for our company as I've made in my comments for over 10 years, and certainly within the United States, opening that many sites that we did simultaneously, I think that's part of the thing that exacerbated, if you will, some of the challenges that we're facing right now within the US labor market. To answer your question though, it took us a little bit to really start suspecting things around the wages. I mean normally and I think this is probably true for most anyone in our industry, the symptoms are looking at your application rates, number of people that are showing up at your door to want to get a job. And you start looking at your recruiting or once you hire the folks, the number of people that show up, or once they show up, the number of people that, what the absenteeism rate is. And then once time is going on, you know what that attrition level is. Now these are normal drivers that have been around for many, many years, but normally when you start suffering one of those, candidly I would say most of the time it's kind of operationally driven. It could be things we’re suffering in poor management. It could be things that we're not doing from a recruiting standpoint in the local market. And naturally we accept the accountability and we started focusing inwardly, but once we worked on this for a while during the ramps and we just weren't moving the needles enough. And then just all the commentary that we're all reading in the papers about minimum wage pressures. I mean keep in mind now we've had 22 in our country that have raised the minimum wage. I don't - as we look at those things, those are things that are - we're starting to scratch our head and say, I think maybe we've got some challenges here on the wage side. So we have been able to get a couple of our locations where we've made some moves, some of those candidly. We made moves on our own without getting the support from the clients. In other places we were able to get support from our clients. It is something that's going to take us a little bit to get some of our customers comfortable that they believe that's the root cause issue when they've got to work through their budgets as well, and just trying to fund some of these things and where we are. So we're just looking at things probably improving for us more in that second half of the year. Again what's encouraging is I believe this is something that in the beginning is going to be a little tight because I don't know if our competitors are all moving at the same time that we are. I would say probably not. That's going to create a bit of unevenness, if you will and maybe when you're chatting with other colleagues of ours, our competitors, how they speak about it. But I do think we are starting to see - we've already seen some of our big clients, particularly in banking industries, they own their own, have announced their wage increases. So I believe it's real and I believe the industry will adjust. That's the good news. The challenging news is I just don't know how fast. And again for our group of customers and these conversations we're having, we’re anticipating more of the second half of the year to get some of those things resolved. It’s a long answer to your question, but it's a complicated thing just trying to kind of give total context to it.

[Mike Malouf:]

Great. And then when you take a look at your target operating margins over time, I know that you’d always sort of had some numbers that you thought you could reach. Have those changed? And if not, can you kind of remind us where you think you're headed?

[Chuck Sykes:]

Yes. I feel like as much as I've talked about it, you guys could all kind of punch me in the nose and say you feel like they've changed. But just keep in mind in 2015 we did close out the year at 8.5%. 2016 we came in right around 7.7%, just on Sykes legacy, not including anything with the new acquisition of Clearlink. This year work we’re coming in on Sykes legacy, not with Clearlink, probably around 7.8% I think it is, John. And the thing - the reason why I share with you guys the 8% to 10% is not to try to imply to you guys that's our guidance. That’s not our guidance. I'm just trying to be really transparent in saying that when you guys are looking at your models about our company and you're saying, where are the earnings growth going to come from? From within the firm. Forget tax rates and looking at that. I mean you only got revenue strategy or productivity strategy. And all I'm trying to share to you is that until the day comes, if I ever say to you structurally it's changed, any time we're performing beneath that, you guys can still say hey, they're not guiding to it this year. But as I extrapolate out from my own models, do I believe or not believe that they're going to be able to get into that range? So I mean you'll see that we still have levers on the side of productivity to create some shareholder value there, in addition to the revenue side of the equation. Now to answer your question, do I believe that it has changed? No. And the reason, even with our US challenges that we’re having right now, we're pretty darn close and the reason why is because the rest of the company is running pretty well. And that's what's really helping us right now in kind of this collective team effort for us to be able to still continue to have respectable margins. It's not where we wanted to be. It’s not the way we model. It’s not the way we challenge ourselves inside. And we do believe that the market pricing in the US, once this gets adjusted, it will not stay like this forever. It will get adjusted. We will still be in that range. I just don't see anything that has systemically really said oh my goodness, the structure has completely changed.

[Mike Malouf:]

I mean I guess really my focus on that was I think it's reasonable to expect that with some improvements, that we can get into that bottom end of that range. I guess I'm really interested in hearing if you think the top, maybe that 9% to 10% part of that range is reachable still in this environment, because we haven't seen that in a while and you could say the range is 8% to 12%, but if you still remain 8%, then you're within the range. And I’m just - is that upper end really feasible?

[John Chapman:]

I mean, Mike, as Chuck said, we're doing pretty well everywhere excluding the US at the moment. And for what we've got a line of sight on, if we could fix what we can see in 2017, then 2018 you will look at 100 basis point improvement. So if you think about implied gains being low 8%, 8.2% say, the additional 100 basis points should take us over the 9%. So that gives you a line of sight above the midpoint of the 8% to 10%. And that's not completely fixed in all the US to where we think it really structurally wanted to run, but for what we've got line of sight on today.

[Chuck Sykes:]

Yes, you guys - yes. Mike, I think you guys you follow this enough to know when I’m - and I know the 8% to 10%, I think at times I've confused people when I give that, when I look on a full year, but in our normal size and structure, typically as you know, Q1 we're there if you’re looking in that 8% range. Q2 has been a little interesting for the past few years. It's been below the 8%, but in Q3, Q4, comes in pretty strong. So we're kind of in that zone where in those quarters run in that range, which normally means for the full year on Sykes legacy, we would probably be running anywhere from 8.4% to 8.6% on Sykes legacy. This is absent to Clearlink. So you're right. I mean we should definitely get over the 8% for a full year basis if we're achieving our goal. But as John commented, just given the strength that the rest of the world is performing at right now, I mean shoot, if we had the US just performing not even again at quite that target, it would be 100 basis points better. So anyway again, we're not guiding to that and that's the part want to get confusing, but I will absolutely tell you, I mean it's there. That's inherent in our business and we just got to go unlock it and get some of those things resolved.

[Mike Malouf:]

Great. Thanks a lot.

[Operator:]

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

[Bill DiJohnson:]

Johnson on for Bill Warmington.

[John Chapman:]

Hey Bill.

[Chuck Sykes:]

Jonathan.

[John Chapman:]

Bill DiJohnson.

[Chuck Sykes:]

Yes. Right.

[Bill DiJohnson:]

So I wanted to dig a little more into AT&T. How did it fare in the quarter for you guys organically?

[John Chapman:]

Organically it was down 3% and so for the year it's really down 4%. Clearly with Clearlink it's up 15%, but yes, organically down 3%.

[Bill DiJohnson:]

And what's driving that?

[John Chapman:]

Just general's weakness in volumes. We have seen - for the largest client, we've seen some mix shift between onshore and offshore. I couldn’t actually tell you about seats, but I would suspects seats have not declined. But it’s really just a mix shift change that we've seen in AT&T in Q4.

[Bill DiJohnson:]

Okay. How much of your capacity additions is related to AT&T if I can ask?

[John Chapman:]

In terms of specific capacity added for AT&T, in the 18 months it’s about 700 seats.

[Bill DiJohnson:]

But the communications vertical in general was up very strong.

[John Chapman:]

Yes. We've got multiple new clients in the telco arena and growth in core clients outside AT&T.

[Chuck Sykes:]

Yes. So we’re still seeing, I mean all this stuff within AT&T, it’s - as you know, just even with their own mergers and activities and things that they're doing, there's quite a bit of change that they're using within their service strategy. So that I think has caused some of the flux that we had here just - when you look on a quarter to quarter basis, overall I would say in the communications vertical, you are seeing certainly a lot of effort and push on some of the digital channels and self-serve and I have no doubt that that is making some of the impact. But on the other hand, we continue to see supplier consolidation which has played well for us in that vertical. And you're also seeing the convergence of companies using the customer service channel to now become much more involved in the sales channel. And that's particularly relevant as you think about in the world of communications, how so many of these companies are now going through their own disruption if you will, to where they're moving more and more into the world of content. So when they wake up every day, they're looking back and they’re saying, my goodness, we've got all of these content customers that aren't mobile customers or mobile customers that aren’t content customers. And their work right now is really trying to get their large, extremely large customer base using all of their services. So what happens is sometimes the volumes will go down. Maybe it's digital. Maybe it's just the momentum of new wireless subscribers coming on, and then suddenly two quarters later, they'll want to suddenly use some of that idle capacity that we have to start helping in the sales channel to cross selling their services. So it is dynamic and all, but it's not really systemic of anything broken in the relationship or anything dramatically changing per se in that industry.

[Bill DiJohnson:]

Okay, got it. Do you see this headwind subsiding in 2017 or still working through?

[John Chapman:]

We're not going to give specific vertical guidance. I think we do have - in every vertical we've got some clients that are challenged going into the New Year, but we're still confident that communications could be a nice source of growth for us in 2017.

[Bill DiJohnson:]

Got it. All right, thanks a lot guys.

[Operator:]

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

[Vincent Colicchio:]

Chuck, you’ve got another quarter of Clearlink under your belt. Any new learnings there you might want to share?

[Chuck Sykes:]

Yes. I’ll tell you, the thing for Clearlink that we're really excited about for us we are seeing a lot of relevance now with this theme that we're calling the convergence of marketing sales and support. That's something I think is going to take a little bit of time for us to probably get it to the point that everybody that we're chatting with outside says they get it and understand it. But we're seeing a lot of the relevance with that. And part of the thing for it is that just in the last question that we were just having, many, many of our customers are really wanting us to help them drive revenue now. We're not moving out of the cost side of the equation or the post-sale support side, but it's really nice now the see how we can engage in conversations with them to really help stimulate demand, particularly now in the digital channels, which is really Clearlink’s core competency in that case, and it's nice. It’s just - it’s starting to change the whole way I think that they think of us. It's early and again the success of Clearlink and the rationale for the acquisition really didn't depend on us getting that integration figured out. I mean they on their own are continuing to grow quite well and perform well. But still for me, as we see the world changing in our industry and particularly around this, some people say customer service is the new marketing. When you chat with people in the marketing field, you’ll often hear them use that phrase. I just feel like Clearlink is going to be a big play for us in making sure our company is still very relevant in the years ahead. So not a whole lot of specifics necessarily, Vincent, but just more of the feeling of great team, still performing on their core and really getting nice responses from our current clients from an interest level.

[Vincent Colicchio:]

Question on another sort of differentiator for you. The at-home business sequentially was up nicely. It was down a little bit year over year. Any color in terms of, is it still - do you still think it's a growing business over time? Is this still going to be a relevant thing for you? What are your thoughts?

[Chuck Sykes:]

Yes. it's - as we look at industry trends and these phrases that we kind of use to capture things that have been shaping a lot of our decisions for many, many years, number one at that is this phrase you hear, the new world of work. And I think when people talk about that early on, that new world of work was all about globalization. And as you know, our company was truly one of the first movers to leverage that and get into it. The next thing though to me, I mean where we are today, absolutely. We still believe in the home agent. We still believe in our investment thesis, that out of the call it - there's three and a half million people in North America that are employed in this industry. About a million of those work outside the US today. The remaining balance, our belief is that 30% will end up working from home. I will tell you that we were right on the trajectory coming out of 2012, 2013, 2014 on how we thought it was going to go. I will tell you another trend as we all know that’s emerged in the last couple of years and is on everybody's mind is cybersecurity and that did create a little bit of headwind for some of our customers on the home agent side. Some of their internal risk management teams wanted to slow down the ramp in some of those areas. So I think that's what you're witnessing That's the bad news, but the good news is that under the guise of the new world of work, I think everybody is now also coming to the realization, particularly in the United States, that the labor - the growth in our labor supply is a bit problematic. I think we all recall from 1990 to 2000, I think it was growing 1.8% a year. We're now down to about 0.6%. I think the long term outlook is 0.5%. In the demographic in which we hire is the 19 to a 27 year old, I think we're starting to see the challenges. I have no doubt, but I think that's what's affecting some of the things on wages. So we are now starting to see customers, particularly as we engage with them in conversation about price increases to help deal with our wages, which is probably all a result of these foundational issues. We're starting to see a new renewed interest in home agent. We're also now taking home agent. We've got it deployed in Germany. Germany is dealing with the labor supply issue and we're going to soon have it in 2017. We'll have it rolled out in the UK. So I think it's going to be very, very relevant for us and something I'm glad we invested in.

[Vincent Colicchio:]

Okay. Thanks for answering my questions, Chuck.

[Operator:]

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

[Frank Atkins:]

Thanks for taking the questions. Wanted to ask a little bit about capacity utilization, especially oriented towards the Americas. What do you see in terms of the trajectory into 2017 and can you remind us what increases in capacity utilization does for margin?

[John Chapman:]

Yes. In terms of - let me say in terms of what we see in 2017. If you remember, we price business at 85% utilization and clearly we're significantly adrift of that today. However, what I would say is even with the improvements that we see in our guidance, we will probably in the second half of the year, get above 80%. So clearly that’s not where we would want to be. In terms of our impact on operating margin, it does increase or cause a decreasing rate impact. And again what we gave in the guidance is, we said that if we could fix the US issues, which is partly labor attendance, but partly occupancy, we could get 100 basis points on our guidance for this year. And so if you think about the 100 basis points probably gets us just above the 80%. Clearly we've got some way to go. Exactly where we could get to in terms of when we get to 85%, I wouldn’t really want to see how far we can get above the 100 basis points. But clearly there's still room for us to improve going into 2018.

[Chuck Sykes:]

Just on that, Frank, you may recall just over the years some of the things that we've talked about is when you wrap the low range, I mean let's say we're starting out and we're literally 60% utilized in our facilities, if we went from 60% to 70% in general, just this is an average, it would be different depending where you are in the world, but in general you could get about three points or 300 basis points. As you're moving up now, we're sitting at 74 and moving in. If we were to move into 85%, we're probably more down into the 20, 30 basis points, just purely on the basis of facilities. The wage issue and everything right now is probably the bigger lever that we've got the poll in the US. But that was some of the commentary that I've always shared over the years, that as we talk about, it increases at a decreasing rate.

[Frank Atkins:]

Okay, great. That’s helpful. And then could you go through areas of strength in the EMEA demand? Nice performance there. Where are you seeing those pockets of strength?

[Chuck Sykes:]

Yes. Well, I mean it's continuing within our - we're in the same geographic markets, but just sort of in the UK, certainly Germany and up in the Nordics have continued to be from a market standpoint where the clients are a good source for us. And what we're seeing too is that in Europe, our legacy as a company, I think you guys know back when we got started, was always embedded in technology. And interestingly, our folks in Europe continue to thrive pretty well there, and also just some of the areas in financial services and then communications. But I'd say for them right now, the technology side of the house is doing quite well. And when I say technology, a lot of it has to do within the communications infrastructure, networking, that type of things.

[Frank Atkins:]

Okay, and last one (crosstalk).

[John Chapman:]

And Frank, just to answer, I think you asked about the 2017 seat additions. We’ll probably odd between 3,000 and 4,000 gross seats. And probably net wise, we’ll probably end up adding 2,000 in the year, roughly around those numbers.

[Frank Atkins:]

Okay. And then could I ask about M&A going forward? You've done Clearlink, but it seems like there's potentially other areas of growth out there. What are you looking at and what is your capacity for additional M&A?

[Chuck Sykes:]

Well, the things that really have been catching our eye here now for some time, but it's not always easy to find the right one, but it's certainly again our plan is, you guys know it was about the trend in the labor market and kind of like that said the new world of work that we felt like we needed to have some capabilities. And today it really is so much about this, the term I used, this convergence that we're seeing with marketing and the relevance of these digital channels and looking within artificial intelligence now and machine learning and chat bots. So our company historically has always been a firm that provided operational capabilities to help clients execute customer service initiatives. That's still very true. But in the future we will have a little more of a technology side of the house capability that also not only helps our customers execute customer service initiatives, but execute now marketing initiatives. And so we're looking at companies in those areas that we just still would be able to strengthen those there in that way and again for the world we see ahead.

[Operator:]

Our next question comes from Robbie Bamberger with Robert W. Baird. Please go ahead.

[Robert Bamberger:]

Thanks for taking my question. First, are you seeing any noticeable shifts in preference for onshore or offshore delivery from clients?

[Chuck Sykes:]

I can't say that on a general statement, but that would be an accurate statement for certain clients, which probably if you think about it, has kind of always been true to some extent. But certainly it continues for us. We continue to see just more of a balanced approach, but certain select companies, they are they are thinking about that. Some of course in the last couple of years have repatriated. But also keep in mind, I mean out of the seats that we added this year, we're probably looking at close to 70% of those being outside the US. And for the ones that we're talking about, John is talking about next year, 90% of those will be outside of the US. So it's a nice balanced demand side right now I would say.

[Robert Bamberger:]

All right, thanks. And then also regarding the potential border tax, I was wondering what you think the implications could be to the business and how Sykes could respond.

[John Chapman:]

Yes. I mean clearly there’s lots of discussion on that at the moment. Exactly how it would impact us, it really is early to say. Clearly we've got a significant amount of US businesses offshore. However, people expect currencies would move and all these moving parts. I think it's very difficult for us to figure out if that would be a net positive or net negative. It really just depends on all of the specific proposals and what actually gets put in place. Clearly we're keeping an eye on that in terms of the whole, that whole tax change, the ability to repatriate profits, what that does to our capital allocation strategy. All of those things we’re clearly waiting on and then we'll really then provide guidance as to what we think the implications are for ourselves.

[Robert Bamberger:]

Great. Thanks.

[Operator:]

This concludes our question-and-answer session today. This also concludes our conference. Thank you for attending today’s presentation. You may now disconnect.