Sykes Enterprises, Incorporated
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day and welcome to the Sykes Enterprises, Incorporated first quarter 2015 financial results conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, that today's call is being recorded. 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. Mr. Sykes, the floor is yours, sir.

[Chuck Sykes:]

Thank you, Mike and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises first quarter 2015 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 quick summary of our operating results, after which I will turn the call over to John who will walk you through our financials and then we will open up the call to questions. I would like to start with a quick recap of our first quarter financial results. We had a solid quarter. We saw good revenue growth on a constant currency basis of 4.7%. We have now delivered eight consecutive quarters of comparable constant currency growth. Growth was also fairly broad during the quarter. In fact, our top 50 clients, which represent more than 85% of our revenue base, were up 8.5% on a constant currency basis. We saw healthy demand from both existing and new clients and across the technology telecom, healthcare and transportation verticals. Even more noteworthy, demand was resilient despite the disruption from the inclement weather which impacted many of our sites in the United States and Canada in the first quarter. First quarter operating margin also came in very strong, thanks to the initiatives we have been working on around agent productivity and capacity rationalization. Our non-GAAP operating margins were up 240 basis points to 8.1%. This was the highest first quarter operating margin we have posted since the first quarter of 2009, when we reached the decade high of 9%. And finally, we generated solid earnings growth which was up 42.5%, highlighting the solid operating leverage in our model. We also generated healthy operating cash flow in the quarter, the highest quarterly amount in more than a decade as well as operating cash flow margin was equally impressive at 8.8%, the highest amount in almost a decade. We sustained our strong balance sheet while we reinvested in our business and returned cash to our shareholders. All-in-all, we had a solid start to the year. While we have revised our business outlook down a notch, it is worth noting that we are still forecasting revenue growth in 2015 in constant currency term, better are still our upward operating margin trajectory for the year remains intact, thanks to the strong execution. Even though run rate demand has been reset a bit, our underlying sales momentum remains largely intact. Fundamentally speaking, we continue to see a healthy pipeline of business and due to our strong market positioning, we are winning our share of those opportunities. With the leadership addition in sales we announced last year and with continued investments in our sales resources, we believe we can build further upon our underlying our success just as we are on the cusp of delivering on our 85 to 10% operating margin target. With that, I would like to hand the call over to John Chapman. John?

[John Chapman:]

Thank you, Chuck and good morning, everyone. On today's call, I will focus my remarks on key P&L, cash flow and balance sheet highlights for the first quarter of 2015, after which I will turn to the business outlook for the second quarter and full-year. During the first quarter, reported revenues came in at $323.7 million, above the top end of our revenue range of $315 million to $320 million provided in our February 2015 business outlook. The revenue outperformance relative to the outlook was broad based, spanning clients within the communication, technology, financial services and transportation verticals. On a year-over-year comparable basis, although revenues were down 0.3% on a reported basis, constant currency revenues were up 4.7% in the first quarter. By vertical market, on a year-over-year in constant currency basis, technology was up 29.1%, healthcare up 10.3%, communications up 2.7% and transportation up 1%. First quarter 2015 operating margin was 7% versus 4.5% in the same period last year. on a non-GAAP basis, first quarter operating margin increased 8.1% versus 5.7% in the same period last year, primarily driven by higher constant currency demand, agent productivity gains, improved capacity utilization and expense leverage, coupled with a favorable foreign exchange impact of approximately 110 basis points. First quarter 2015 diluted earnings per share were up 53.1% to $0.77 versus $0.24 in the comparable quarter last year. On a non-GAAP basis, first quarter 2015 diluted earnings per share increased 42.5% to $0.43 from $0.40 in the same period last year, relative to the $0.35 which was the midpoint of the company's February business outlook range, or $0.33 to $0.36. Hence the $0.08 earnings outperformance was essentially all driven by solid operational performance. Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 50% of total revenues during the first quarter, up from 47% in the same period last year due to growth within several of our top 10 clients. We continue to have one 10% plus client, our largest client AT&T, which represents multiple distinct contracts spread across four lines of business, represented 18.8% of revenues in the first quarter of 2015, up from 15% in the year ago period. After AT&T, client concentration dropped sharply. Our second largest client, which is in the financial services vertical, represented only 4.6% of revenues in the first quarter of 2015 versus 5.8% in the same period last year. The percentage decrease stemmed largely from a program completion. On a consolidated basis, during the quarter, the approximate net operating profit impact of all foreign currencies including hedges was approximately $2.6 million favorable over the comparable period last year and roughly $500,000 favorable sequentially. For the second quarter and full-year 2015, we have hedged approximately 82% at a weighted average rate of 44.35 Philippine peso to the U.S. dollar and 80% at 44.55 Philippine peso to the U.S. dollar, respectively. In addition, our Costa Rica colon exposure for the second quarter and full-year 2015 is also hedged 83% at a weighted average rate of 560.09 colons to U.S. dollar and 82% at 559.14 colon to U.S. dollar, respectively. Now let me turn to select cash flow and balance sheet items. Net cash provided by operating activities in the first quarter was $28.6 million versus $16.2 million in the year ago quarter, driven by higher net income, non-cash items and contributions from working capital changes. During the quarter, capital expenditures were $10.9 million. Balance sheet at March 31 remains strong with a total cash balance of $214.1 million, of which $194.5 million or 90.9% was held in international operations and is deemed to be indefinitely reinvested offshore. At March 31, 2015, we had $74 million of borrowings expanding, with $171 million available under our revolving senior credit facility. In the first quarter of 2015, we repurchased approximately 221,000 shares at an average price of approximately $23.14 per share for a total of $5.1 million. We have 780,000 shares remaining on our $5 million share repurchase program authorized in August 2011. Receivables were $270.9 million. Trade DSO on a consolidated basis for the first quarter was 76 days, unchanged sequentially and comparably. The DSO was split between 75 days in the Americas and 80 days for EMEA. Depreciation and amortization totaled $14.5 million for the first quarter. Now let's review some seat count and capacity utilization metrics. On a consolidated basis, we ended first quarter with approximately 39,900 seats, down 1,300 seats comparably and down 1,100 seats sequentially. The comparable decrease in seats was due ongoing facility rationalization, which was partially offset by capacity expansion in the EMEA region. The first quarter seat count can be broken to 33,200 in Americas and 6,700 in EMEA. Capacity utilization rates at the end of the first quarter 2015 was 78% for the Americas region and 88% for the EMEA region versus 74% for the Americas and 85% for EMEA in the year ago quarter. The capacity utilization rate on a combined basis was 80%, up from 76% comparably and up slightly sequentially. The increase in the consolidated capacity utilization rate on a comparable basis was driven by capacity rationalization and higher demand. Now let's turn to the business outlook. The assumptions driving the business outlook for the second quarter and full-year 2015 are as follows. Although full-year operating margins are expected to remain relatively unchanged compared to those provided initially in February 2015, we are fine turning the 2015 diluted earnings per share and revenue outlook due to ongoing foreign exchange volatility and somewhat lower demand forecast from a handful of existing clients within the communications vertical since the initial full-year 2015 business outlook, the functional currencies of our various international operations have weakened further relative to the U.S. dollar, which is expected to impact 2015 revenues by an incremental $17 million above the initial $50 million in foreign exchange impact forecasted in February. In addition to the foreign exchange impact, a handful of clients have forecasted lower volumes for the remainder of the year during the large part to more muted competitive dynamics expected in the industry, which is also impacting revenues to the tune of approximately $20 million. As such, the combined effects of both are anticipated to result in full-year revenues of between $1.27 billion and $1.285 billion versus the initial revenue outlook range of between $1.3 billion and $1.2 billion. Diluted earnings per share are now expected to range between $1.54 and $1.62, from a range of $1.56 to $1.68 previously. Our revenues and earnings per share assumptions for the second quarter and full year are based on foreign exchange rates as of April 2015. Therefore, continued volatility in foreign exchange rates between U.S. dollar and the functional currencies of the markets we serve could have a further impact, positive or negative, on revenues on both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter and full-year as discussed. We still plan to add approximately 1,700 seats on a gross basis in 2015 to support certain client program expansions. In the first quarter, we added roughly 400 seats in a gross basis out of planed 1,700. More than three quarters of the gross addition are expected to occur in and around the first half of 2015. On a net basis, however, we still anticipate that 2015 seat count to remain relatively unchanged relative to 2014, as we plan to rationalize roughly 1,700 seats. We anticipate net interest expense of approximately $0.8 million for the second quarter and $3.4 million for the full-year. These amounts exclude the potential impact of any future foreign exchange gains or losses and other expenses. And finally, we anticipate a slightly lower effective tax rate for the full-year 2015 relative to the initial business outlook in February, driven chiefly by a shift in the geographic mix of earnings to lower tax rate jurisdictions. Considering the above factors, we anticipate the following financial results. For the three months ending June 30, 2015, revenues in the range of $300 million to $305 million and effective tax rate of approximately 27% on a non-GAAP basis and effective tax rate of approximately 30%, fully diluted share count of approximately 42.4 million, diluted earnings per share of approximately $0.18 to $0.21, non-GAAP diluted earnings per share in the range of $0.24 to $0.27, capital expenditures in the range of $17 million to $20 million. For the 12 months ending December 31, 2015, we anticipate the following financial results. Revenues in the range of $1.27 billion to $1.285 billion, effective tax rate of approximately 26%, on a non-GAAP basis an effective tax rate of 27%, fully diluted share count of approximately 42.8 million, diluted earnings per share of approximately $1.32 to $1.40, non-GAAP diluted earnings per share in the range of $1.54 to $1.62 and capital expenditures in the range of $50 million to $55 million. With that, I would like to open the call for questions. Operator?

[Operator:]

[Operator Instructions]. The first question we have comes from Mike Malouf of Craig-Hallum. Please go ahead.

[Mike Malouf:]

Great. Thanks for taking my questions.

[Chuck Sykes:]

Absolutely. Hi, Mike. How are you doing?

[Mike Malouf:]

Great. If maybe you can just kind of step back a little bit and I am wondering if you can give us a little bit of perspective on the underlying growth in new business. I know that we still have an enormous amount of business that has not been outsourced yet. And as you look out into the future, I am just wondering how much can you think you can capture that? What is the underlying churn? It almost seems like you guys are taking share from each other in the business and that there is just not a lot of new big and large opportunities coming out. So I would love some perspective on the industry dynamics as it stands currently? Thanks.

[Chuck Sykes:]

Yes. Mike, I will try to answer your question in the short time frame here that we have. But I think first thing, just stepping a way back, if you read the industry regs and depending on what source you look at, whether it's in Gartner or Forrester or so forth, so on, I think in general consensus you will see where they are projecting the outsourced industry to grow around 4% to 5%. Also keep in mind that when you look at the sheer size of the number of people that have worked in the industry in totality, it's around 8 million people today. And out of that 8 million people, they are estimating that somewhere around 15% to 20% is outsourced. So those are the numbers and things that we look and study. Now obviously you have variances within different geographies around the world. The U.S. is at a different pace than maybe what you would experience in Brazil and so forth so on. But in general without having a global perspective, a global footprint, we do look at that number as a good benchmark for us to measure ourselves against. Also within there though, you do have to look at the differences within each industry. And this is where it gets to be a little challenging, I think particularly for someone where you are sitting. I mean it's challenging enough for us in trying to get a good understanding of the market opportunity and things, but technology is a big user of outsourcing. So it's very fair to say that they are probably outsourcing almost half of their business, maybe even more. Credit card companies have been bigger consumers of outsourcing, more so than retail banking. Communications, particularly in wireless, has probably outsourced close to 40% to 50% of their business. So healthcare is maybe 10%.. And as you look around at the different industries and the different countries you are in, depending where you are trying to target, it's going to effect the overall dynamics and the intensity the competition in there. Now Sykes is really looking at the communications, the financial services, the technology, the healthcare, those big four. We do operate in transportation and we do report on that. We do also operate in retail but the ones that we see really moving the needle for us is communication, finance, technology and healthcare. And within communications, you are absolutely right. We have a lot of insurance competition there. It is a fight for account share and your performance and making sure you can protect your base. But it's also been, for communications, the industry overall for the last several years has seen nice growth as we look at what has taken place in the world of digital and mobility. So that has been an intense area, but it's a place that's given us growth because the market overall has been growing. Now as you read and you start seeing a slowdown in the intensity of the mobility uptake rate or the number of new devices or as we alluded to in our comments around communications, even the intensity within that industry amongst those suppliers will effect the overall volumes that we are receiving. And to put that in perspective, some of our companies, our clients that we serve in the wireless side, last year alone made over 10 changes to their billing plans, just to give you an indication of the state of competitiveness. That's significant for us because billing questions are probably the number one driver for the wireless sector that we serve. So we ever see changes in that or more stable outlook, it will effect the growth going forward. So there is a lot of dynamics there and things are taking place. Financial services was one where we do have intense competition in credit card, but we do see in retail banking an area where banks are looking to outsource, embrace outsourcing in a more aggressive way and we see that as being a little more new business for us. And it's something that we still think as a company, we have a lot of growth potential in that sector, which is why you saw us taking actions last year to continue bringing in new leadership to help us take advantage of that. Technology, for us, as a company was our first place we started. It went somewhat through a maturity cycle when mobility came up and tablet computing and started changing. But now in technology, we have this group we refer to more as new tech, the new businesses that are emerging and we are starting to break into some of those. And I think you saw into the quarter, where in John's comment, 29% quarter-over-quarter growth. So we are certainly excited by that and we think we have new potential there. And that's new business, because these companies are growing so rapidly and relatively new that they are just now beginning to outsource. And then healthcare is one where again maybe it's a 10%, 15%, similar to retail banking, but again with all the changes in healthcare and the new business models that are emerging, we do believe there is going to be more and more opportunities for us there to find more growth channels. So that's about just as a general commentary the framework. I mean it's a deep dive. That's almost an all-day discussion if you really wanted to get comfortable probably. But I think this will give you feel about, it is more than just taking account share from each other. There are disruptions that are taking place around the world and within these four industries that are causing new opportunities for new growth. It isn't all just about head-to-head competition. But one of the thing that is a little challenging in our business is how quickly we can move in the brick-and-mortar environment and even though I am talking to you about these numbers, when we receive volume reduction forecast, it's just not the kind of thing that we can always be in a position that we can transfer that business, retrain, capture new business, get it up and running at the same time. It is pretty operationally intensive to be able to do that. And right now we have someone, I will just say in acute situation with the volume forecast that we got from a number of companies in the communications sector and it's a bit faster than our ability to go and take some of these other programs and get it replaced. So I wouldn't let our numbers, sort of the things that we just guided to, or the changes in our outlook on revenue change your view of the growth prospects for companies like Sykes in this industry. It's a very large industry and I think there is going to be good growth opportunities for some time. We are not talking about crazy growth. We are not talking about running consistently double digits. We have always for us, that we can run at the market pace, 4% to 5% is what the market is, we have always said 4% to 6% and that's really net growth when you think about it, because it's gross adds minus whatever's going on with your current volume of business. And we have been able to do that for the last couple of years. We had 5.7% and 7.4% and then this year it's turning out to be a little flat for us right now. But over the course of three years, we are holding our own out there relative to the market.

[Mike Malouf:]

Great. Thanks a lot for all the details. Thanks for all the detailed color.

[Chuck Sykes:]

Yes. Okay. Thanks for the question.

[Operator:]

Next we have Bill Warmington of Wells Fargo.

[Bill Warmington:]

Good morning, everyone.

[Chuck Sykes:]

Good morning, Bill.

[John Chapman:]

Good morning, Bill.

[Bill Warmington:]

One quick clarification, when you are talking about the 4% to 6% or 4% to 5%, as a gross level or a net level of growth for the industry?

[Chuck Sykes:]

Yes. Well on the market side, from the market growing, they would only be speaking about it in terms of growth. Because what they are talking about is saying, look if you have got 8 million people working 20% or 1.6 million outsource, they are looking at the total pie growing 4% to 5%. Now are it relates to us as a company, being able to hold on and grow our business at the same range, we are talking net, right. Because we do always have dynamics happening in our business. So normally, Bill, what that means for us as a company is, we need to be waning. Like when you hear us reference and we don't breakout the pipeline and everything, because in the end, it's about, are you growing or are you not? And for us, what happens is, on a gross basis, we really need to be generating almost 8% to 10% growth sells and then whatever is happening with the volume below is how our net comes out. [indiscernible].

[Bill Warmington:]

Here is the question. What needs to happen in the business for you guys to drive that 4% to 6% target growth? Do you need to change the vertical mix, geographic mix? Why has the growth been so patchy?

[Chuck Sykes:]

Well, I believe the growth is passing this business. Just it does kind of move in fits and stats. It is somewhat of the nature of it. It's a B2B business. We are not dealing with thousands of customers. We are dealing with hundreds. And when you work to get your centers up and running to 85%, 90% you are pretty dependent on what's happening with that portfolio of clients. So it's suddenly, it's got a downturn. I mean, it does have fits and stats. So even with our capacity utilization, Bill, we would love when we are talking about going to get to 85%, but the perfect scenario is that every country that you are operating is at 85. That is what we try to do but it typically isn't the way it happens. It is usually a little more lumpy, like you might get to 90% in one part, you may be sitting at 65% like we were in the U.S. So that's the characteristic of the business. I think you guys, years ago. U.S. had been lumpy. it continues to the lumpy.

[Bill Warmington:]

Given that lumpiness, is it just the reality of the way the business is? Are there changes you can make in terms of the vertical mix or the geographic mix? Is it a scale issue? Meaning that if you get big enough and diversify enough?

[Chuck Sykes:]

I would have to agree in that. Yes, if we can get the company over the $2 billion mark, then you get more, think of it as flying at more altitude. It does help you deal with some of the lumpiness if you were. You do get a little smoother stream of earnings. I have to admit that. But the other characteristic is that you do have to watch with the client concentration. And so we have got to get, that's why you are hearing us right now with our growth really wanting to get things happening in technology, things growing more in financial services. And we are really encouraged with the fact that Q1 we grew 29% in technology and we do believe by the second half of the year, you are going to seeing more growth in financial services. So we can get a more even distribution across the client base in the industry. That will help in minimizing your propensity to lumpiness in your business.

[Bill Warmington:]

All right. So one last question then. In terms of the demand softness that you are seeing on telecom side starting in this quarter or the second quarter, how many companies, how many customers are we talking about where you are seeing that? Is it just one customer or is it multiple customers?

[Chuck Sykes:]

Yes. We are looking at around three to four customers for us. And it's something, to me, I think again is that we are just seeing in the state of the competitiveness for those large market that we serve that industry and just the dynamics that are taking place. One thing to emphasize in that, we are giving you guys the guidance based on the forecast that we got from our client. They know their business well. We have to trust in that. But I will tell you, these are not program completions, right, or what sometimes we refer to as end-of-life. These are volume forecast. So it could change. We are not in a position to do that right now and this is our guidance and this is what we are operating on today based on that forecast. But it is a situation where the programs have gone away and there is no chance for volumes to come back.

[Bill Warmington:]

Got it. Thank you very much.

[Chuck Sykes:]

Thank you.

[Operator:]

Frank Atkins, SunTrust.

[Frank Atkins:]

Thanks so much for taking my question. Can you talk a little bit about the attrition rates in the hiring environment, specifically in the Philippines? Just what you are seeing out there right now?

[Chuck Sykes:]

Yes. The intensity of the competition is certainly much, much longer than it's been in the past. But at the same time, the projection of growth that we are experiencing now on the offshore locations, I would say it's at a more controllable state. So the labor market in the Philippines can support the industry. You will see to our attrition levels for us have gone up compared to where they were five years ago. But it's on a pretty controllable state right now. We are not seeing something there that's alarming or that it's growing. Every year it's getting worse and worse and worse. I would say, we have reached a little more of a steady state type of thing. I will tell you too that offshore you are looking at attrition rates that are probably 40% of the rates that you see maybe in other developed countries like in the United States. So it's a good environment to operate in.

[Frank Atkins:]

Okay. Great. And can you talk a little bit investments that Sykes has made in security or privacy of client information? And what are you hearing from clients in regards to that?

[Chuck Sykes:]

Yes. Security is something that is top of mind for everyone. I don't think it's just even our industry. I mean it's the world and it's kind of sad state of affairs when you comment on it. I can tell you personally when I look at the amount of money that we spend and the amount of money that we continue to spend, it is definitely a new item on our P&L that has emerged over the last five years. I don't know if I see it at this point in time dramatically increasing. The thing that is changing for us as a company is the level of sophistication that our team has built internally. But security is one of those things that I don't think you ever really want to tout how good you are, because I think we are learning in the market, the synergy to figure out once they, you know somebody figures out something else. So it's going to be a challenging area. But we think, as a company right now for us, the security is everything from your protocol that you put in your hiring processes to your facility, physical security to your network security. Even as simple as clean desk policies. There are certain human capital strategies that we are deploying and the way that you interact with your people. We are serving predictive technologies now that we are starting to deploy. There is a lot of masking technology, I call it masking where you can protect the customer service professional and the customer from exchanging credit card information, social security numbers, whatever those things maybe. So from a technology standpoint, I think the world will keep up with it. Typically the security issues boil down to people and I think that's going to probably always continue to be one of the bigger challenges. But for us right now, it's something that is both -- it's a concern. I think about it a lot. But at the same time I think we have some pretty good discipline in our presentations. I think it can be, for us, it's a little more of a differentiation. But it's something we are going to have to watch, Frank, for a long time.

[Frank Atkins:]

Okay. And last one from me, are you seen any changes in terms of new business on the billing type, either to more outcomes oriented or different models where you take on a little bit more of the risk?

[Chuck Sykes:]

Yes. There is definitely interest in that merging. I can tell you personally we are interested in that. I don't know if it's something that is going to become really broad-based and the norm. To get the outcome-based billing, it does require the client to come and give over to you certain control and trust that maybe they are not comfortable with. That fact alone I think will make it to where it will just become a component of the market. I don't know what percent. I could see it to maybe 20% of our portfolio would move into that way. And it's something we are interested in because we are operating with some of those outcome-based billing models today and they have proven to be quite successful. So we would like to get more of them.

[Frank Atkins:]

All right. Great. Thank you very much.

[Chuck Sykes:]

Thank you.

[Operator:]

Next, Kevin McVeigh, Macquarie.

[Kevin McVeigh:]

Great. Thanks. I wondered if you can give us a sense, Chuck, is any telco demand a function of the new iPhone 6 and EMV impacting called into the call center offers? Maybe just any other trends beyond just the seasonality or just projection of volume? Anything bigger driving those trends?

[Chuck Sykes:]

Yes. Kevin, there isn't an answer I can give you that I would say is a possible relationship. Certainly we are seeing advances in self-serve technologies and all but at the same time, we are seeing dramatic increases in the sheer quantity of interactions. So if you didn't self-serve capabilities, you would probably be real trouble trying to serve your clients. I think we all can intuitively understand that in our lives 10 years ago we had 1.7 devices per household Today it's 2.7 and it's continuing to grow. So the sheer quantity of interactions to anticipating to increase. And with that I think you are going to see advances in self-serve. The hard thing is, what's the impact on voice. And that's not a direct correlation. The things we do see more correlation on and I think this is somewhat intuitive. already of the billing changes, the intensity of the competition, that is a very, very direct strong correlation to our volumes. But the other thing, it's just a newness of new devices. When the first iPhone came out that was a very big paradigm shift. All of us who had consumers that get used to it. And then with hen that all of the changes in the billing plans. And billing has moved as we all know from voice to data. That too has been a learning curve for consumers. And even though every time I do technology, a new device comes it, it does increase volume. I don't think this is as much of a learning curve for us a consumers anymore. And I think we are getting more popular with the way the billing plans are set up too. So those are the things that we think are probably more fundamentally causing our clients to have to really fine tune their volume forecast. There is still big volume. It's still a lot of volume. It's a lot of people. And again, those things could end up changing. But that I think is what we are building into the formulas more.

[Kevin McVeigh:]

Got it. Chuck, at some point, does that change how you need to price? And does that impact the seasonality of the business? Are there, in terms of, we should think about the quarterly cadence?

[Chuck Sykes:]

I don't think at this point in time, we have enough information that I would, you guys would change your modeling or looking at the way you look at our business from a seasonality standpoint. Strategically, for us as a business and I think collectively for us, as an industry, we are anticipating the transactions that are being handled by our people to continue to be primarily complicated problems. And that's something that we do think in going to have operational implications on us. But I don't think it is going to be dramatically changing pricing or those types of things in doing that.

[John Chapman:]

And Kevin, we don't see a seasonality to be that different in 2015 versus what it has been in 2014.

[Kevin McVeigh:]

Awesome. Thanks, guys.

[Chuck Sykes:]

Thank you.

[Operator:]

Next we have Shlomo Rosenbaum of Stifel.

[Shlomo Rosenbaum:]

Hi. Good morning. Thank you for taking my questions.

[Chuck Sykes:]

Hi, Shlomo.

[Shlomo Rosenbaum:]

John, you are going to like this one. As AT&T year-over-year is up by about $11 million and the revenue is essentially flat. Should I look at the rest of that being currency related? Or how should I be viewing it?

[John Chapman:]

Just trying to see the numbers you are looking at, Shlomo.

[Shlomo Rosenbaum:]

Just 15% of revenue of last year's quarter in AT&T and then 18% or 18.3% or something like that? And it was flat, the reported revenue is flat, so the implication is I think about $11 million higher from AT&T?

[John Chapman:]

Yes. I mean all I would say is, as we have said in [indiscernible], we clearly got significant AT&T growth but also we have got significant growth with another top 10 client. And clearly, AT&T has been a significant driver, both in the quarter and in 2014. I need to look at your specific constant currency numbers, Shlomo, to really zone in on what you have got going there. But I would say that we got broad based growth across multiple verticals, multiple clients, inside the top 10, outside the top 10. But you are absolutely right, AT&T has been a dominant growth factor for us in 2014 and in quarter one. But it is certainly not the single factor.

[Shlomo Rosenbaum:]

Okay. And is this the highest level of revenue AT&T has ever been for the company?

[John Chapman:]

Yes.

[Shlomo Rosenbaum:]

Okay. And then in terms of margins, you guys have got into the low end of the targeted range, Is this a sustainable margin range? Or is there something that was helpful, particularly in terms of the hedging benefit to the margins that might not necessarily imply that we should just model it at this kind of a base line going forward?

[John Chapman:]

From a margin standpoint, yes.

[Chuck Sykes:]

Shlomo, there isn't anything particularly like a one-off or anything. We are very, very close in just running in the zone. Q3 last year 7.8%, Q4 9.6%, Q1 8.1%, Q2 ironically just being low and it was low last year. That is not a structural issue, although I guess, if you all hear me talking about this for the next two years, I would have to tell you it is but at this point in time, this has been a strange occurrence of events that happened in Q2 for two years back-to-back. But I think as you see the year progressing, you will see that we are pretty much, when you look back and probably when we end 2015, we will probably look back and see for the last five quarters, six quarters, we have been pretty much in the range with the exception of the Q2 time frame. So I would ay, as you are modeling going forward, just to keep in mind we were at 5.8% in 2013, we came in 7.2% I think 2014, we are guiding here around 7.5% for the full-year what we are looking at. So we are pretty much getting into that zone. And we still have with the Americas utilization at 80%, we still have a little more room there to gain on some of the facility rationalization. We really like that to be at 85% to get into the zone. So if you look at our trajectory, it is probably safe to keep it in that range.

[John Chapman:]

Yes. And we were really pleased with the Q1 numbers. We got surprised by the volume increase. We delivered lots of increased EPS. But going by quarter three last year, we were close to 8% at 7.8%. We blew through the 8% to 10%, well we were 9.6% in Q4. We got to 8.1% in Q1. We clearly have got a weak quarter two, even though quarter two this year is going to be a year-over-year improvement and that will make eight quarters in a row if we achieve that. We do have a weakness there. And if you look at the implied guidance for the second half of the year, again within that 8% to 10% range. So absolutely we are knocking on the door. There is no special one-off that impact in Q1 that was not operational and just delivery. So we really see ourselves as right there and what the exception is clearly Q2 still has a bit of work to do. In terms of the demand cycle, we have got combined with softness in the communications vertical we spoken about, we see that as being still the biggest job to get each of our quarters towards that 8% to 10%. We don't need to Q2 in that 8% to 10%, but we certainly can improve it the mid-five that we were talking about just now.

[Shlomo Rosenbaum:]

Okay. Thanks. And then lastly, has there been some fundamental changes undergoing in the financial services vertical since Drew Blanchard joined?

[Chuck Sykes:]

You mean internally insight? Or are you talking about from a market perspective?

[Shlomo Rosenbaum:]

No, internally. I was just saying someone with that kind of experience at Accenture and I remember talking to him probably like six, seven years ago over there and that for a long time. Has there been any changes internally in your go-to-market or client relationships or anything like that?

[Chuck Sykes:]

Yes. Well, the thing is, certainly with all that the experience, Shlomo, the thing is, Drew is embracing the structure that we have put in place where we are wanting to build more vertical domain expertise. With that comes some maturing, if you will, just the way you manage our strategic account relationships and everything. So he is very much involved in bringing some of those methodologies and techniques, certainly working with the team and giving him the coaching and assisting and their own competency assessment and he is working with the operations team to just try and make some adjustments as he sees fit. But it's a structure that we have launched and Drew was just a good piece of the puzzle to go in and help us execute it. And he is very familiar with it, as you are alluding to and we really just think it's going to make the execution much, much better. But it takes a little bit of time. It's only been in six months and I think really in this business, I means just getting your really making an impact is probably a good year timeframe. But certainly in the six month, he has been hard at work.

[Shlomo Rosenbaum:]

Great. Thank you so much.

[Chuck Sykes:]

Thank you.

[Operator:]

Adam Dahms, Baird

[Adam Dahms:]

Hi, guys. Thanks for taking my question. I guess just one quick one on free cash flow. If I look, historically it looks like it has been weighted a little bit more towards the second half of the year, but you guys started off, it looks like pretty strong here in Q1 with $18 million. Has anything fundamentally changed in terms of free cash flow conversion? I guess how should I think about that playing out for the rest of the year?

[John Chapman:]

I think you should project as you have, as we have done. We have done a good job in quarter one. We did some good collection work, working capital came down. But in terms of the overall dynamics, I would say it's unchanged.

[Adam Dahms:]

And then, I guess what are your priorities currently in terms of cash flow usage, buybacks, acquisitions, things like that?

[John Chapman:]

As you can see, in quarter one, we did do 200,000 shares of buyback. We still have 780,000 that is pending. We will continue to do that. And we do have a facility available for that, plus we also looking at and always have been looking at potential acquisitions, both in terms of platform, as we have spoken about and done in the past and in terms of vertical markets. And Chuck's always looked at the healthcare vertical. We anticipate for that vertical we may need to look at some sort of acquisition to get the size we need for that vertical and the expertise. And I would say there is really no change at this point in time. We are active in the market looking at a number of assets that are out there and we are continually evaluating them in terms of the overall strategic goals of Sykes.

[Adam Dahms:]

Great. That makes sense. And then if I could just one last on margins. There is kind of like there moving parts I am looking at, the suboptimal client elimination, FX impact and then the communications volume weakness. I am just curious how those three component factor in the full-year margin expansion plans?

[John Chapman:]

Well, the suboptimal program is roughly 2% of revenue. And we expect FX to be roughly a five point impact on revenue this year. And so you could see roughly speaking we have got, 1.3% in total, we are looking at 7.7% growth in new business. So this is margin. The suboptimal business is 2% and FX is 5% and our overall net growth in constant currency is going to be 1.3%.

[Adam Dahms:]

And then, I guess I am just curious --

[John Chapman:]

The margin impact is pretty big contributor [indiscernible], the negative [indiscernible]. Sorry, can you repeat that question?

[Adam Dahms:]

I am just curious how those three pieces play into the margin guidance?

[John Chapman:]

Well, FX impact, as in terms of it doesn't impact our operating margin at all. EPS is impacted by $0.08 for the FX year-over-year.

[Adam Dahms:]

Well, the suboptimal clients, I guess that seems like that should be a margin benefit when those come off?

[John Chapman:]

Yes, as it was client, we take it as breakeven.

[Adam Dahms:]

Okay. So no impact there. And then the communications weakness? Any impact on the margins from that?

[John Chapman:]

No, not really, It's just a revenue issue. Not rather a margin issue. You could see that the margin outlook remains unchanged.

[Operator:]

Well, that would conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

[Chuck Sykes:]

Thank you, Mike. I don't have any other closing remarks other than just thanking everyone once again for your questions and your answers and the company. We look forward to updating you guys next quarter. Everyone have a good day.

[Operator:]

And we thank you, sir and the rest of the management team for your time today also. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and take care, everyone.