Sykes Enterprises, Incorporated
Q1 2008 Earnings Call Transcript

Published: 3 Jun 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Sykes Enterprises, Incorporated earnings conference call. My name is [Marisol], and I will be your coordinator for today. (Operator Instructions) Management has asked me to relate to you that certain statements made during the course of this call as they relate to company's future business and financial performance are forward-looking statements. 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 [inaudible] 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 presentation over to Chuck Sykes, President and Chief Executive Officer. Please proceed, sir.

[Chuck Sykes:]

Thank you, Marisol. Good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises first quarter 2008 financial results. Joining me on the call today are Mike Kipphut, our Chief Financial Officer, and Subhaash Kumar, our Vice President of Investor Relations. On today's call I will first touch on the highlights of the quarter and then comment on the demand environment as it relates to our business. Mike will then discuss the financials for the quarter, after which I will wrap up the call with my closing remarks and then open the call up to Q&A. Let me first start by saying that we are off to a solid start in 2008. Even amid the mixed macroeconomic picture and the dislocation among peers within the customer contact management industry, our underlying business momentum appears to be healthy. Our solid financial and operation performance during the quarter, coupled with our upwardly revised year end business outlook is proof of that. We have now either met or exceeded our earnings outlook range for 15 straight quarters since the completion of our offshore REIT positioning in the third quarter of 2004, and over that period we have boosted operating margins from essentially breakeven in 2004 to 7.4% in 2007 and 8% in first quarter of 2008. This strong track record of financial outperformance is the direct result of our business mix, be it markets, delivery footprint or verticals. Let me take a moment to expand on that. First, we serve 16 markets, which translates into almost 50% of our revenues coming from outside the United States market. Second, our 19-country strong delivery footprint can serve almost 80% of the $37 billion large global customer contact management market. And third, we are diversified across five verticals and numerous business lines, serving upwards of 200 clients. That focus on creating the right business mix has helped us to deliver strong broad-based growth, coupled with expanding margins, while mitigating our risk profile. With that, here are some of the highlights from the first quarter of 2008. First, we delivered another quarter of record revenues of $203.7 million, up 21.2% on a comparable basis. The growth was driven by the Americas and EMEA regions, both up 20.4% and 22.8%, respectively. Our ability to convert sales prospects into contract wins remains strong as highlighted by the revenue growth split between new and existing client relationships at 55% and 45%, respectively. Growth also remained broad based as our top 40 clients, which represent over three-quarters of total revenue, were up 28.8% comparably. This broad-based growth highlights our strong operational performance and the overall quality of our revenue growth. Second, we increased operating income 20.2% and delivered operating margins of 8% even as we grew revenue at a double-digit rate and added seat capacity. This is the third straight quarter of 8% operating margins, putting us on a path to achieving 8-plus percent operating margins on a sustained basis. Third, we successfully broke ground on a new 130-seat center in Odensk, Denmark. This client-enabled facility was brought on stream in the latter part of the first quarter of 2008 and will be housing Technology clients, among others. And finally, we maintained our industry leading low client concentration profile, with no single client representing more than 5.7% of our first quarter 2008 revenues, and our top 10 clients as a percentage of revenues remained unchanged on a comparable basis at approximately 40%. I'd now like to take a moment to comment on the demand environment and the proactive steps we are taking to manage our business. As I mentioned in my opening remarks, our underlying business momentum appears to be healthy. We remain well positioned in the marketplace as we have a targeted value proposition that can address a good portion of the global customer contact management market. The result? We continue to see sales opportunities and continue to see healthy conversion rates. These opportunities reside virtually across all of our verticals, including Telecommunications, Technology, Health Care, Financial Services and Travel. With that said and given that the overall economic environment remains in a flux, we continue to strive to stay ahead of the curve. We understand that all business cycles are not created equal, and as such continue to manage our exposures proactively. Toward that end we continue to challenge our business unit and regional managers across the globe to proactively manage their cost structure in order to deliver cost-effective solutions to our clients. This is particularly important given the sustained headwinds in terms of foreign exchange and wage inflation. Although they could begin to moderate, these pressures thus far continue to persist. As such, we continue to focus on optimizing key cost levers such as agent-to-manager ratios, merit pay increases, pricing, new hire fall out rates, procurement efficiencies and IT infrastructure. We believe having a strong operational platform coupled with strong sales leadership will keep us on track toward building the business model that can deliver sustainable revenue growth and operating margins. Now I'd like to hand the call over to Mike Kipphut. Mike?

[Mike Kipphut:]

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, after which I will turn to the business outlook for the second quarter and full year of 2008. A point of note before I discuss the quarter. Given the seasonality in our business and in order to gauge the underlying strength of our business, we believe it's best to look at our financial performance on a year-over-year or comparable basis as opposed to on a sequential basis. This seasonality is influenced by certain client programs and geographic regions. For example, client programs such as DSL experience some seasonality during the second quarter as college students return home at the end of the school year. Demand from travel portal clients is the strongest in the first and third quarters. Similarly, the EMEA region also experiences seasonality in the third quarter due to the European holidays. Although there will always be exceptions, we believe comparing results on a year-over-year basis provides a more meaningful framework for assessing financial results. For the first quarter 2008, consolidated revenues increased 21.2% to $203.7 million over the comparable quarter last year. That growth was broad-based, spread across various verticals including Transportation, which was up 80%, Financial Services, up 45%, Technology, up 30%, and Health Care, up 14%. Our first quarter earnings per diluted share were $0.38 versus $0.29 on a comparable basis and versus $0.26, which is the midpoint of the diluted earnings per share range we provided in our Q1 outlook. The $0.12 earnings per diluted share outperformance versus the midpoint range breaks down as follows

[Chuck Sykes:]

Thanks, Mike. In closing I want to thank all of our employees for a job well done. Our focus on our business mix has enabled us to post quarter after quarter of solid financial performance in light of the company specific issues faced by some players in our peer group. We continue to make strides toward attaining sustainable operating margins. First quarter results are another step in that direction, and with the mixed macroeconomic picture, particularly in the United States, we continue to monitor the inflections on our clients' business. And although headwinds remain, namely currency volatility and wage inflation, the proactive steps we have taken to manage our risk profile positions us well to capitalize on the demand for outsourcing and offshoring. And finally, before I open it up to Q&A, I'd like to extend my kudos to Mike Kipphut and his finance team. Forbes magazine in its April 2008 edition listed Sykes Enterprises among the 100 most trustworthy small cap companies based on a criteria devised by Audit Integrity, which is the leading provider of accounting and governance risk analysis on public companies. Way to go, Mike. We are proud of Mike and his finance team's achievements, as this recognition is no small feat given the size and global reach of our organization. And with that, I'd like to open the call up to questions. Operator?

[Operator:]

(Operator Instructions) Your first question comes from Josh Vogel - Sidoti & Company, LLC.

[Josh Vogel:]

To start, of the wage increases that you're seeing across several of your client programs, I was curious which geographies and verticals are you seeing the bulk of this pressure?

[Chuck Sykes:]

The majority of the pressure really comes from the offshore locations, and with that being a significant part of our company and our delivery footprint, that's one of the reasons why we've talked about it for so long. But we're still running in these offshore areas in a range of 9% to 10% annual increases. The other areas are more at an inflationary rate and not quite as significant. They're more in the 3% or less range.

[Josh Vogel:]

Now I know you collected about $9 million in receivables a week after the quarter ended, but why are you being more lenient with some of your EMEA clients' payment terms? Are you just losing some leverage here with these clients, and should we expect that DSO is to be higher going forward?

[Mike Kipphut:]

These are just certain clients in certain countries, and the only reason why we're increasing that is to remain competitive with our competition specifically in those countries. I'll be the last one grant extra terms on our receivables, so it's a matter of just being competitive and matching what our competitors are doing at this point in time. I do not see it continuing as a total European mandate, that we'll see higher DSOs. It's, again, just certain countries.

[Josh Vogel:]

I notice you had a notable drop in revenue from Communications clients both sequentially and year-over-year. Are you guys losing market share here or are these clients' incoming call volume just drying up in general?

[Chuck Sykes:]

No, the thing on the Communication is in the past I've been asked the question Chuck, where do you see the growth coming from? And we've responded identifying the areas of Communications and Financial Services. Those industry clusters continue to be the place that we look for our growth, and we still believe that. What you're looking at here in Q1, I mean, we're just taking an acute view in the way it's set up right now, and what we have is really three things that have taken place as it relates to Communications - one is that we had one of the larger clients within the Communications sector that we'd migrated to our Filipino operation; the other is that we did have one of the clients also, a separate one, that had moved some of the business in house as it related to some of the union commitments that they had worked with. This, again, is something that's taken place over '07, so on a comparable basis you're seeing that pop out. And then the other is just, quite candidly, if you remember some of the conversations in the past, we've wanted to address some profitability issues. We had a couple of accounts that were in our Latin American operations that we just couldn't come to mutually agreeable terms and so we just decided to part ways with two of those relationships and they happen to be counted in our Communications side. So what you're not able to see but I think it will start coming out in the numbers later is that we've basically got all of these programs replaced with other ones that are currently in the midst of being ramped up, which is one of the reasons why this really isn't affecting our overall margins. I mean, you're continuing to see our guidance. Our growth is moving, and we still feel good about the growth outlook. The other thing is that it's not related to quality. There's nothing here that we're talking about where we had a fallout with a customer or somebody lost a relationship with us over performance. And those are really the key things that are [inaudible]. But that is why specifically with Communications you're seeing that change.

[Josh Vogel:]

Outside of online banking, are you seeing any other areas of shrink in the Financial Services vertical?

[Chuck Sykes:]

Outside of Retail Banking?

[Josh Vogel:]

Yes, sorry.

[Chuck Sykes:]

Well, the short answer is yes. We do continue to see opportunities with some of our existing clients in the credit card space and some of those that are in insurance, but right now when we look ahead - and when I make the comment or state to you guys that we're looking at the growth in the next two years coming in finance - we do see a lot coming out of retail banking. And ironically enough, I mean, with the challenges today that a lot of that industry is facing, it actually cause them to want to embrace the opportunities for outsourcing. So right now today that really is just creating some opportunity for us. Some of these companies are having to make some really difficult decisions. I think you're going to continue to hear some announcements coming out of that sector regarding some layoffs and things, and all that usually kind of plays to them looking at embracing outsourcing as a way to reduce future costs and put more variability into their model. So I think all of that's kind of manifesting itself right now in our opportunity.

[Operator:]

Your next question comes from David Koning - Robert W. Baird & Co., Inc.

[David Koning:]

I guess my first question, just on the EPS progression through the year, I know there's a lot of EPS sensitivity to the timing of when seat capacity comes on, and I'm wondering if a lot comes on in Q3 and if we should actually see EPS come down in Q3 and then bounce back pretty nicely in Q4. Maybe you could just give a little color on kind of the EPS progression through the year.

[Mike Kipphut:]

I think overall we would like to just stick to the guidance that we provided in the second quarter and for the full year. That's where we have the most views at this point in time, where we've concentrated on, and just would like to keep it at that for the time being. But you are right. There is some variability overall in when these seats are added, and we're just using our best estimates right now. And something perhaps we planned in one quarter may spill over to another quarter or may come a little bit sooner than we anticipated. And again, that's part of the reason why we do provide ranges as well. But other than the second quarter, I don't think I'd like to get into specifics.

[David Koning:]

The other thing, you know, with the Philippines currency coming back mildly in your favor over the last several weeks now or a few weeks now, I guess, it seems like you have a chance this year to average, including the hedges and the non-hedged portion, you have a chance this year to average somewhere around 43 and then maybe next year average somewhere close to 43 again. Given a pretty headwind in '08 and then a potential flattish sort of year in '09, does that give you the chance for more margin expansion in '09?

[Mike Kipphut:]

There's that potential. You know, what's really helping us from a perspective overall, wherever the Filipino peso moves in addition to the hedges that we already have in place and at the rates I previously said is that keep in mind, when it does move, particularly in the way it has over the last couple weeks to three weeks, that it also improves our margins. You know, as the Filipino peso jumped from 40.80 to 41.80, it certainly did help the margin improvement over time. And as I stated previously, when we get a 1% movement in the Filipino peso, it could either help or hinder our earnings per share by as much as $0.03 per share. That still holds true. So with the hedges we somewhat mitigated the downside and so we just have to keep all that into consideration as we do have these movements in the Filipino peso in particular.

[David Koning:]

And then finally just on the tax rate, you know, obviously a nice tax rate in Q1 and again in Q2. It seems like the back half of the year to get to your guidance ranges is still kind of in the original guidance range of around 28. Should we think of it that way, the back half 28% and then into '09 is the best guess just to stay around the 28% range?

[Mike Kipphut:]

Yes, I would say the 25% to 28% range is probably the best range to use. And again, it's so dependent on where you had the taxable income generated that a move from an offshore location to a domestic location or to Canada or Europe can have a pretty significant impact. So the mix of earnings really has a big play in it overall. So I would just certainly use the 25% to 28% range again.

[Operator:]

Your next question comes from Thomas Smith - First Analysis Corp.

[Thomas Smith:]

On the capacity utilization, I know you broke it out overall and for the Americas. Have you talked about what it was specifically just for the U.S.? I know you've broken it out in the past.

[Mike Kipphut:]

No, we haven't but I'd be glad to try to pass that along to you at this point. It hasn't changed dramatically. You know, we added a few seats in the U.S., so in the first quarter of 2008 we're still at the 72%, 73% range which is plus or minus 1% change from the fourth quarter. And it's up pretty substantially from a comparable basis in the first quarter of 2007. We were at approximately 65% then.

[Thomas Smith:]

And then it looked specifically in your EMEA region that you had pretty good results, and I know part of that is the strength in the euro but was there anything one time in there for the margins to get to around 7% or so?

[Mike Kipphut:]

No, nothing specific, a one-time item. We do have this situation where sometimes the weather, whether it be in Europe or other locations, may influence a factor of some expenses. And sometimes it's just pushing off expenses to later quarters; when what you actually plan, for example, on a consulting basis doesn’t come to fruition and you're just off maybe a month or so on the G&A side. So we did have some of that occur, not only in Europe but in the Americas as well. That did help our margins in the first quarter.

[Thomas Smith:]

Okay, but in your view this level may be not, the 6% to 8% range for the EMEA region, is that sustainable?

[Mike Kipphut:]

It should be sustainable.

[Thomas Smith:]

And then the last question. I know this is tough for you to forecast as well but, you know, your other income bouncing around quite a bit. Is there any - well, I guess, what's the expectation for that going forward? Do you expect that to come down or, I guess, how big of a factor is that in your EPS guidance for the full year?

[Mike Kipphut:]

Yes, that's really tough to estimate. That's probably one of the areas where I have the - and our team, financial team  has the biggest challenge. And a lot of it just depends on what the currencies do at any particular point in time at the end of a quarter. If you have emerging economy currencies, sometimes they'll swing pretty dramatically from day to day, and you might get caught in that. So, for example, if you're holding U.S. dollars in the Filipino entity - and I'll send you the wild swing - it may influence that transaction gain or loss pretty substantially just on a couple days swings. So that's where we have a big challenge, and we do not hedge that. We hedge cash flow items, not balance sheet items, and we try to keep a good balance of receivables and cash at the different entities where appropriate, where it's possible. So that can swing as much as anything from as little as $500,000 in one direction as a loss to $500,000 gain, so there's a potential for a $1 million swing on other income, and that's really what has caused us a little heartburn because if you look back at the fourth quarter of 2007, sequentially I think we had about $200,000 in other income, and then of course it increased by about $1 million to about $1.2 million in other income for the first quarter of 2008.

[Operator:]

Your next question comes from Robert Evans - Craig-Hallum Capital.

[Robert Evans:]

Mike, could you comment a little bit more, maybe not necessarily guidance but give us a little bit greater idea in terms of seat ramp the second half of the year in terms of how the balance of the seats that are remaining, how should that be weighted between Q3 and Q4?

[Mike Kipphut:]

Yes, I think you're going to see more of the ramps in the fourth quarter versus the third quarter, but again, it's timing. When you get into that August, September, October timeframe, it gets tough from our standpoint to determine exactly when these seats are going to be placed in service and so there may be a little overlap between third and fourth quarter, but as a general rule, perhaps 60%, 70% in the fourth quarter and the rest in the third quarter.

[Robert Evans:]

Should we then expect more of the expense associated with that ramp to be in the third quarter?

[Mike Kipphut:]

There's certain elements of the ramp that you'll see in the third quarter versus the fourth quarter as you get ready to ramp up a location, however overall I think most of the ramp, as far as training and all that, will take place over a sixmonth timeframe once you start opening a facility or a new location. But, you know, the expenses such as utilities and security and some of the other security items that you really have to take into consideration as a facility opens, that'll hit just prior to the opening of the facility, a month or two prior to it.

[Robert Evans:]

So thinking sequentially about Q3 versus Q2, how should we think about seasonality?

[Mike Kipphut:]

Yes, again, I think I would like to limit our comments specifically to Q2 and not get into Q3 and Q4 until we get into the next quarter. And then obviously we'll provide guidance for Q3 and an update on the full year once again.

[Robert Evans:]

Sure. I think we're just trying to make sure we've got the seasonality right, not necessarily trying to pin you down on specific numbers. I know, for example, EMEA certainly has a negative seasonality impact in Q3. I'm just wondering, are there other factors that may not be as obvious?

[Mike Kipphut:]

Yes. The major item is the European holidays in the third quarter. And then, you know, you're going to have the ramp situation, which we just talked about a little bit as to timing on that. Historically fourth and first quarter is always our stronger quarters. I think that's going to be true going forward as well.

[Robert Evans:]

Chuck, can you comment a little bit more just on the overall demand environment. You've been able to show very good growth in '07 and starting off here in '08. Is your pipeline building or strong enough where we should expect strong growth? How is that pipeline shaping up, I guess, for 2009, and give us a general idea of the demand and pricing environment that you're seeing.

[Chuck Sykes:]

Anecdotally speaking based on what we're getting reported here with our sales organization and the guys, I mean, things right now continue to look healthy for us. And we certainly are still getting growth in some of the more older lines of business around the area of technology but the things, again, that I do believe are going to make more significant or at least create opportunities for more significant material growth is the Communication and Financial Services. So within those verticals, the thing that I am feeling good about right now, too, is again, the overall balance that we're starting to get in a sense of the delivery footprint. We continue to have a nice opportunity, of course, for the offshoring, but the other thing is that we are continuing to see growth opportunities within the U.S. One of the things, just to comment on that, that makes it a little different and it probably doesn't help you guys in trying to build your models but, you know, when we were building everything offshore for the last few years, the cycle time that it takes to get a facility offshore used to be almost nine months. Now, it certainly has gotten much, much better, but in the U.S., as most of you guys know, we really built all of our centers in the U.S. and today we're kind of looking at a mixture of that. We will probably be gravitating more towards leased facilities in the U.S., and there are, of course, centers that are out there available from the last four years of migration. Now what that means is that it gives us the opportunity to do - one, to have a shorter cycle time of getting a facility put online to meet demand, which is the best situation you can have. And that maybe some of the things that we think in the next quarters ahead may help us from hitting our margins a little bit from the way it used to be, when you've got to build nine months ahead of the curve. The challenge is we can't give you accurate - I can just explain that to you in a story as to why it may change, but it's a little more difficult today because the whole story today isn't about everything going offshore and that just makes it a little more difficult for us to give you some of that color as you're building those models. I just wanted to share that with you since you were asking questions on the seats.

[Robert Evans:]

And when you look at the seat growth that you're seeing for this year, where will it predominantly be?

[Chuck Sykes:]

Yes, Bob, right now, I would - the way that the growth is in the sense of revenue is we're getting nice revenue opportunities right now in Europe, we're getting nice revenue opportunities for U.S. delivery for the U.S. market, and we continue to get nice delivery now with the Philippines and even in Latin America. Now keep in mind when I'm talking about revenue is that in Europe it probably takes, you know, 70% of the seats to equal that of the U.S. whereas in the offshore locations, you know, in the Philippines, you probably need 50% more seats and in Costa Rica and Central America, maybe 30% more seats. So it doesn't necessarily mean that in terms of quantity but in terms of revenue what we're really enjoying right now in our business model is we're getting some nice distribution, and we think that's one of the reasons why we're continuing to see nice sales opportunity for us.

[Robert Evans:]

Wondering, given what you just said, if you'd be willing to break, you know, if you look at year-over-year and you use your guidance, basically, call it $110 million on an absolute dollar basis or so, if we're going to look from a percentage break on how much would be Europe versus U.S. versus Philippines, or I'll call it offshore, ballparkish growth? I'm just, you know, if you were going to segment that growth out, just curious how you'd segment it out.

[Mike Kipphut:]

Yes, that would be a little tough to do overall. I would say it's not going to be too different than what we've reported in the past as a breakdown in segmentation between revenues between Europe and Americas. And Europe's been running anywhere from 31% to 34% of total revenue, somewhere in that range. I don't see a drastic change.

[Robert Evans:]

Another question as it relates to your growth, how much of it is coming from basically in source going to outsource versus you getting that from competitors?

[Chuck Sykes:]

This is anecdotal. I don't have a sheet here with the actual numbers and breaking it out with it, but I would just tell you that it depends on the different sectors. When we're in the Financial sector, particularly in Retail Banking, they're relatively new to outsourcing so the majority of that is coming from in house and their decision to go and just embrace outsourcing. In the other areas it's coming from account share. It may be that they're just migrating from one provider to another. And then we are having some of the sectors still that it's just coming in through growth, like we have some U.S. companies and Asian companies that are experiencing growth in Europe, and typically those companies like to have one company serve all of Europe for them, maybe at most two, and that's where our footprint gives us an advantage. So it's a combination, Bob, and I'm sorry I don't have the specifics to give that to you, but just to kind of give you color with it, a little flavor with it.

[Robert Evans:]

When we talked about margin goals in the past, you know, you did 8% this quarter and guidance was kind of implied around 8% for the year on operating margin. Are we feeling more confident that that can ultimately become double digit given where you're going?

[Chuck Sykes:]

Well, you know, the key thing on margin I would just highlight - and I think we have in the past; we'll continue to do this - was a focus on three things. Two things you all have visibility into; the other, you just have to take our word at it. That is that we have to address some internal profitability issues. If you guys recall, I've highlighted in previous conversations that if we had everyone of our clients today hitting our internal profitability targets, and again keep in mind we've got 200 clients, we today would be knocking at the door on 10% margins. Now is that practical to think that you would always have every client hitting that? It's not. We've been in this business a long time, and that's just one of the natural attributes of it. Is it a goal? Absolutely, and that's part of the Communications story you've seen. The other thing, though, has always been around utilization. And as you guys know, we've always tried to benchmark around 80% to 85%. And when we were in the breakeven phase around '04, we were trying to give guidance of saying, "Look, guys, if we can get the business coming from that $480 million base, get it into six, we can get our utilization around 80%, 85%, we feel like we can run the company in 6% to 8%." Well, now we've been moving that growth and now we're moving towards the latter phase, so how do you get it above 8%? And to do that we have to keep delivering on operations, keep our clients; we have to keep adding the new clients and protecting the margins, but now it becomes an economy of scale thing. And in the last call I'd given you guys just a little bit of an estimate. It's not exact science with it, but about for every $80 million in revenue we can add right around 40 basis points of improvement to our operating costs just because of the leverage on corporate overhead. And that's if we keep corporate overhead around 3%, so we've got to do our job there. Now if you look at Q1 '07 to Q1 '08, we added somewhere around $40 million, and if you go back to Q1 and you take out the adjustment we had for the Canadian incentive that we received in Q1 versus Q4, it really was about 7.9% margin, so we picked up about 23 basis points, which is almost exactly one-half of the $80 million in revenue or the 40, right? So we've been able to grow the business, expand, even in times of startup costs and everything, do a good job with that, still address the issue around currency changes and at the same time just add another 23, you know, basis points of operating margin just because of economy of scale. And if we can keep that going, Bob, I mean, we'll get to the 10% margin, but it does mean we need to get over that $1 billion mark. And we're on track to continue to do that as long as nothing comes along and just, you know, hits us here that's unexpected.

[Mike Kipphut:]

Bob, I just want to clarify one item. When I was answering your question previously on the ramps of seats and the Q3 versus Q4 versus Q2, I don't want to imply that there's a delay in ramp by the clients that we have signed up. That's not the case whatsoever. We're not seeing any delay in ramps. Sometimes it's just timing, though, to get everything done and hire at the appropriate timing.

[Robert Evans:]

And I didn't take it as delay in ramp. I just think, you know, as we're trying to figure out how to set the second half, we're just trying to figure out what the weighting of the seats might be so we can model accordingly.

[Mike Kipphut:]

Okay, great.

[Operator:]

(Operator Instructions) Your last question comes from Matthew McCormack - Friedman, Billings, Ramsey & Co.

[Matthew McCormack:]

The first question, I wanted to follow up in terms of the demand from in house versus competitive takeaways. You know, the top 40 clients growing 29% year-over-year, that has been fairly consistent over the last few quarters so I was wondering if you could kind of talk about those group of clients specifically and what percentage of the call center work are they currently outsourcing right now? So, I mean, what is kind of embedded in that existing client base going forward?

[Chuck Sykes:]

Again, I get a little leery in how accurate I feel like I'm answering everyone's questions in this case, but I always like to answer your questions as best I can so all I can tell you is that when we're looking in the areas of technology companies today, technology companies in general, particularly on the consumer side, they have embraced offshoring more than any sector. And that's one of the reasons why Sykes got a leadership position in it is because that was our forte back in the 90s. And those companies in general have outsourced, I would say, as a rule of thumb - I don't have the exact numbers with it - 70% of their business. And we continue to see opportunities there that are kind of coming back to us in two ways. Either some of the companies, that kind of in the higher end - because what we're doing right now in Technology is the growth that's coming from in house are in the higher end services. So we're now starting to do some businesstobusiness support in the Technology side, and that wasn't typically outsourced. In the consumer side, there is some of that from growth, but a lot of that is just coming from companies that were wanting to consolidate their supplier base. And again, I think that's one of the advantages that we have with our global footprint because they're just saying, "We like the distribution that you have," because they want to use fewer suppliers. But then at the same time, Matt, they don't want to have everything in one country. So a company like Sykes that can give them one supplier but give them risk mitigation by putting them in different countries plays to our favor. So that's just kind of anecdotal in doing that with it. If you go into Financial Services, we targeted and entered into the credit card space. I would say today the credit card companies outsource maybe half of their business, just as a general rule of thumb. Now from company to company, that would be very different, but just painting it in a broad level, we still have a tremendous amount of growth opportunity in credit card just in the sense of landing new clients that we have. And that work today is still a mixture of domestic and offshoring, but we still see growth in that area. In fact, even with the economic times, keep in mind our business is driven off of customer interactions and today's times, right now what's going on in the economy is causing a lot of customer interaction. So we actually are seeing some nice growth there and we're actually seeing a big demand in using credit cards right now, everything from groceries to purchasing gas and everything. So, I mean, it's really skyrocketing, and that actually has worked its way into the numbers for us. So we're getting some growth there just because our clients' business is growing and because they continue to move business more from in house to out house. And on top of that we have some of them that have taken some business from our competitors and given it to us. So I can just go down the line and kind of just give you this anecdotal story. It will give you some color, but I don't know if it's going to help you map the really, you know, model our business for you. But the retail side is mainly coming from growth in that sector. There's been some mergers that have taken place. That creates opportunities when they want to outsource. And it also is coming from companies embracing the idea of let's just move some of our internal operations to the outside. And in today's environment, listen, these are tough decisions that these companies make. They're emotional. They invoke, you know, involve their people. But in tough times today, that will sometimes give companies just that extra incentive to pull the trigger on these things and make the decision to want to move them out to companies like Sykes. And that's why our being divested in multiple industries has given us a lot of swings at the plate right now for opportunities for all of these various reasons. So we're not dependent on whether or not it's just pent-up demand or taking it from current suppliers. We're nice and spread across, and at the same time we still have plenty of growth just in the U.S. to move into Communications. We're just breaking into wireless, all right? Finance is just breaking in. We are not doing anything in Government yet. We're not doing anything in a big way in the U.S. in Health Care. In Europe, we're almost all Technology and some Travel. We're just starting to break into wireless there. So we still see opportunities for us to break in and take advantage of the differentiating aspects of our company to get a beachhead. That's why we continue to be optimistic about it.

[Matthew McCormack:]

And you've talked about a large Telco client ramp and a large Financial Services client ramp in the past few quarters. I think you might have just alluded to it when you mentioned wireless. Can you just give us an update on how those contracts are going?

[Chuck Sykes:]

Yes. Right now those are in the midst of being ramped up. One of the things, like when the numbers we're showing on a quarter-over-quarter basis, some of the things I talked about with the offshore move, the one company that moved some of the work back in house just to meet some union agreements and things that they had, those seats are being redeployed on those new relationships on the wireless side, which is why I think you'll see in a little later down the road, you'll see us probably getting back on to where you'll see Communications starting to come around again. But that's why today maybe it's just not popping up in the numbers like that. Then we recently won a rather nice program in the European area for wireless as well. That's in the midst right now of being - I'd say it's about halfway through in its ramp. We continue to see other growth opportunities coming from that client.

[Matthew McCormack:]

The 7% margins in EMEA, and I think you said that 6% to 8% margins you were comfortable with, that's still more than half or less than the mid-teens in the Americas region. I know that's where the offshore capacity is but, you know, structurally how high can EMEA's margins go?

[Chuck Sykes:]

Yes, let me just - one thing I want to be careful about, because I've tried to explain this about two years ago and I think I confused everybody on the phone. We're not satisfied with 6% to 8%. I referenced 6% to 8% at Sykes as a total company. Keep in mind that was a relevant conversation about a year and a half ago because our company was basically breakeven in '04 and I was being asked this question and I was trying to set some guideposts for you guys to go in and say, "How do we start modeling?" And I think you look back and you can see that we've done exactly what we said we would model, that is, as our business came around and our capacity was at 80%, sure enough, we've run this company in the range of 6% to 8% quarter-over-quarter. Now that we've achieved that, now we're having another conversation and that is, "How do you get it to 10%?" And the way that I see that coming right now is we're going to continue to do performance, you know, improvements, we're going to continue to go after profitability issues with some of the clients. We've got to manage the pricing. You know, while Mike's team's giving us air cover with the hedging, we've got to still go back and get our pricing. We're doing that, and that's why you're seeing our numbers sustain. And then the other thing that we've just got to keep working is just getting the economy of scale in our corporate overhead by growing. And I've given the models for that, Matt, that you guys can use to project out, and we're on that trajectory for us right now. The only thing to trip us up is if something external happens in the economy that we don't see coming our way right now or if we take our eye off the ball operationally internally and we start losing our foundation. But right now the foundation's strong and right now we're seeing the opportunities in the pipeline, and we're on that path. In Europe, I do believe Europe can continue to do better. I do think Europe, though, will probably always be at its best maybe 1 to 2 points lower than the Americas at its best, okay? And that just because of the difficulty in Europe with the way it's distributed. It's not as large of a homogeneous market. You just don't get quite as much of the efficiencies. So we still have a lot of work to do in Europe, and we're tickled to death that we're at 7%, but we're not satisfied. We've still got a lot of work there, and our team's working very hard to get it moving in that way. So probably what I would do, Matt, is look more to baseline or whatever we're doing in the Americas. When you see Europe being within a point or two then you'll know that we've really gotten up there to where our expectations are internally.

[Operator:]

This concludes the Q&A session of today's call.

[Chuck Sykes:]

Very good. Well, I'd like to thank everybody for joining us on the call today, and we will look forward to speaking with you next quarter. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.