Sykes Enterprises, Incorporated
Q4 2013 Earnings Call Transcript

Published: 19 Feb 2014

[Operator:]

Good morning, everyone, and welcome to the Sykes Enterprises Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Management has asked me to relay to you that certain statements made during the course of this call as they relate to the company's future business and financial performance are forward looking. Such statements contain information that is based on the beliefs of management, as well as assumptions made by and information currently available to management. Phrases such as our goal, we anticipate, we expect and similar expressions as they relate to the company are intended to identify forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and the company's Form 10-K and other filings with the SEC from time to time. I would now like to turn the conference call over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

[Charles E. Sykes:]

Thank you, Jamie, and good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises fourth quarter 2013 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 provide a quick summary of our operating results and a general commentary about our outlook for 2014, after which I will turn the call over to Mike, who will walk you through our financials. And then we'll open up the call to questions. On balance, our fourth quarter operating results were good. Revenues were up 12% on a constant-currency basis and ahead of our business outlook range. This was the best fourth quarter in terms of revenue growth rate since 2008. Both the EMEA and the Americas segments were up sharply, by 24.4% and 9.1%, respectively. Alpine's growth was also impressive, far in excess of the company-wide revenue growth. And we saw a strengthening of demand, which was fairly broad-based once again, expanding the communications, technology, financial services and travel verticals across both the business-to-business and business-to-consumer segments. Turning to margins now. Non-GAAP operating margins in the fourth quarter were 7.1% versus 7% in the same period last year. Considering the significant costs incurred to accommodate the rapid pace of current and future growth, coupled with the heavy capacity investments, operating margins were respectable. To put the capacity investment in context, we added around 2,300 seats or 30% of total capacity on a gross basis just in the fourth quarter alone against virtually none in the same period last year. Furthermore, because growth in the fourth quarter was skewed more toward new clients, it further capped our margin upside. Despite the considerable ramp costs, fourth quarter cash flow from operations was up double-digit, and we ended the quarter with a solid cash position of approximately $212 million, which enables us to advance our long-term position in the marketplace. I would now like to touch on the demand and dynamics and how we are positioned from a growth and profitability perspective going into 2014. It has been 5 years since the financial crisis, and while the economic recovery has been sluggish since that period, change across vast segments of various industries has been running at a brisk pace. Broadly speaking, whether one is operating in telecommunications, financial services, technology or the retail industry, end markets for products that are staples have been transitioning. Buffeted by uneven economic growth and regulatory changes from the top and innovation disruption from the bottom, our clients are doing their best to stay ahead of the curve. They are looking for ways to better leverage their costs while maximizing revenues, as they seek predictable ROI to reinvest for long-term growth. Doing this amid proliferation of consumer choices, stiff competition, rapid product commoditization and ever-lower switching costs is making that payback even trickier. The net effect of these trends is that it has uppened the stakes in the customer contact management industry, while it is keeping intact the drivers for outsourcing to third-party vendors, in one instance. It is also leading to vendor consolidation in another. Performance delivery is being measured in tighter and tighter intervals, institutionalized by intensive and transparent benchmarking. Complex call types are rising, driven by an increasingly informed consumer. And the same time, the need for a broad suite of solutions and capabilities supported by domain expertise are growing. Against the backdrop of this interplay, we are increasingly viewed as a trusted partner. With our sustained focus and global operational maturity, we can manage complex call types and deliver on the brand promise across our clients' various product lines, irrespective of the contact channel, be it voice, chat, email or mobile. As a result, we are seeing a healthy pipeline of opportunities. In terms of revenues, we believe we are on track to deliver another year of solid revenue growth. Communications, technology, financial services and travel are again expected to lead the way for growth. Operationally, we have an opportunity to build on our margin profile. On that front, we plan to optimize the steep program ramp that we had to staff for in 2014. Since there is a speed to proficiency component to every ramp, it can take customer care agents anywhere from 6 to 9 months to hit the sweet spot of optimal performance. Additional progress on the margin front will be a function of stepped-up productivity initiatives by leveraging the Alpine platform. This includes everything from managing span of control and agent productivity, to driving efficiencies through an optimized support infrastructure. And finally, we are seeing opportunities to rationalize excess capacity. We took a major step in that direction in 2013 by migrating platforms from underutilized centers to either the Alpine platform or a larger, better-utilized center. Although the process is time-intensive, given client sensitivities, we believe we have the success stories and the momentum to advance the process even further. In closing, we had a good fourth quarter. Above all, relative to where we were at the start of 2013, when revenue growth declined in the first quarter, we ended the year on a really strong note with a double-digit increase in revenues. Although the expenses related to program ramps and capacity investments did hit our operating margin, we believe these investments were necessary to enable us to make progress in unlocking the margin profile of the business. While much work remains ahead, we are making progress. First, we completed Alpine Sykes platform integration in the U.S. and successfully ported one of our marquee clients over to Alpine's at-home platform, along with several others. Our conviction around the strategic rationale behind the Alpine Access acquisition was strong. One year out, it is even stronger. Second, we operationalized the client-centric model, everything from aligning key program indicators to calibrating compensation. And we are extremely pleased with the behaviors it is already driving in terms of a faster decision making and greater accountability. And third, we added 7,600 seats on a gross basis and rationalized around 4,700 seats at the same time, while facilitating the transfer of certain client programs from underutilized facilities to either the Alpine platform or a new, higher-utilized facility. In all, we had a productive 2013, and in 2014, we are looking to build on that. Through our ongoing actions and by leveraging our differentiated capabilities, we believe we are well positioned to capitalize on opportunities, while unlocking value for our shareholders. And with that, I would like to hand the call over to Mike Kipphut. Mike?

[W. Michael Kipphut:]

Thank you, Chuck, and good morning, everyone. On today's call, I'll focus my remarks on key P&L, cash flow and balance sheet highlights for the fourth quarter of 2013, after which I'll turn to the business outlook for the first quarter and full year of 2014. During the fourth quarter, revenues were $335.3 million. They were $2.5 million above the midpoint of the business outlook range of $330 million to $335 million. The revenue increase relative to the midpoint of our business outlook was driven largely by run rate demand across the broad spectrum of client programs. On a comparable basis, fourth quarter 2013 reported revenues were up approximately by 10.2%. The increase by vertical is as follows

[Operator:]

[Operator Instructions] And our first question comes from Josh Vogel from Sidoti & Company.

[Josh Vogel:]

I guess my first question is on as we look out long-term margin potential, if we want to get to a sustained rate between 8% and 10%, and I was curious how we get there. Could you maybe give us some insight as to where the leverage is with regard to G&A, capacity utilization, organic revenue growth and the ongoing rationalization of capacity?

[Charles E. Sykes:]

Yes. Sure, Josh. So long term, the 8% to 10% range which -- we gave that direction, if you remember, it was back as far as 2006. I mean, that model still is very much true and it's accurate. The one thing, too, I would just -- I'd like to point out, we're on the path to get there. If you look at the range of 8% to 10%, the one thing that I want to remind everybody is that even absent the need to improve productivity on facilities or with people, or as you pointed out, if we need to reduce G&A, if you didn't have to work on those things, typically, in this business, for every $80 million of growth, we had also said in '06 that you get about 40 basis points of improvement. So the reason why I bring that up, just to remind everybody, is that if you look at our guidance that we're giving, we're showing year-over-year for 2014. We're guiding with about $61 million of absolute revenue growth, and yet we're showing about 100 basis points of improvement. And that's on top of a business that's sitting at around $1.25 billion -- almost $1.3 billion. I point that out because in '06, we were around a $600 million company, and we were trying to give people expectations around the margin profile of this business. So the reason why we're going faster than the 40 basis points, with $61 million instead of $80 million on top of the $1.3 billion, is because of the productivity improvements that we're working on. The productivity, to answer your question specifically now, is around opportunities in G&A, and the biggest part right now with the G&A is still around the facility utilization. And this is something that as long as the overall facility utilization is under that 85%, you're going to hear us constantly talking about that, because it is going to be a top-of-mind issue for us to get it to that point. That's the good news. The bad news is that it is something that takes time. And it takes time, as I said in my comments, because it's dependent upon getting clients to buy into those things, but it is occurring. Now we had a little bit of a delay in it in this year because of the great growth that we were able to turn out did require us to actually put some additional capacity in place. So unfortunately, that kind of deferred the overall number down the road a little bit, but it still doesn't take away from the opportunity for us to continue to get economy of scale and just plain old facility utilization. The other thing is the comments around speed, the proficiency on the ramps. I'd made a comment that it takes 6 to 9 months. Some of the programs that we won are pretty complicated. They're significant in that the sheer quantity of the seats that were awarded to us, the call types, the speed in which the clients needed us to take over operations, just has added to a lot of the complexity. So that speed proficiency is probably going to skew a little more towards the 9 months for some of those programs, not all of them. But that is in the mix, and that's stuff that as we get those things to a steady state, you'll start seeing the margin contribution coming in there. And those are really the 2 big levers. The third one, and the one that we never want to lose sight of, is that we still need growth. And the growth helps us to have a sustainable business and the sustainability of our margins. If we were doing this by not growing top line and just cutting everything, you may get there for a year, but it's just not -- it's not sustainable beyond that. So revenue growth gives us economy of scale in our corporate overhead, productivity on the programs we're ramping, getting on the steady state and continuing to chip away by getting the facility utilization intact. Those are really the 3 big levers that we're working. And again, I mean, just to highlight, I mean, we're growing the company. Second quarter, I think we're starting to see our value proposition resonate with some folks, getting into double digit, which is significant. I -- we're not a company that boasts, and I really -- it's not my nature to do it, but candidly, not many of our peers were turning in that type of growth during the second half of the year that they got. So it's a good indicator, and we are moving the needle on the margins. I mean, 100 basis point improvement year-over-year, and we're continuing to get on that trajectory. So your question gave me a chance, Josh, to add a little bit more color to that thing, because I know that's a big topic here around the margins, but thank you.

[Josh Vogel:]

Yes, that was really thorough. Chuck, you were talking about leveraging the Alpine platform and enhancements that you could make there. And I was curious, as we look at your CapEx guidance for 2014, how much is going to be going to the Alpine infrastructure versus the brick-and-mortar operations?

[W. Michael Kipphut:]

Yes. As we indicated, we do expect about $45 million to $50 million in capital expenditures and -- or about 3.5% of revenues. I think the best way is kind of break it down a little broad. About 2.5% of that is going to maintenance, and then about 0.5% is really for infrastructure and -- which includes Alpine and all these numbers as well. And then about 0.5% is totally associated with growth, so that'll get you about to 3.5%. But I don't break down Alpine specifically, but it is included in our infrastructure and growth numbers.

[Charles E. Sykes:]

Yes. And Josh, just -- Mike gives you on the number side to answer your question specifically. But the part that I would just comment on is that the reason for the investments that we're wanting to make in the platform is really twofold. One is that the company has been in this industry virtual for over 14 years. So the technology platform they have, which we believe, again, is one of a kind, very leading against any industry that we've seen, and we're pretty familiar with the platforms. It was still using some older technology, and we really want to leverage the cloud-based capabilities that everyone's trying to get to today. So we want that for more flexibility and better economy of scale in the future. The second thing is that we want to get it to a point that it's a little easier for it to be portable to us to around the world. And those are things that because of the way communication infrastructures are around the world and just certain things around working with labor law, regulations, so forth, so on, we need the platform to be conducive to that environment. So we're getting prepared for our future strategic differentiation, how we're going to do that. But that's the justification of why we're wanting to invest in the platform.

[Operator:]

Our next question comes from Mike Malouf from Craig-Hallum Capital Group.

[Michael Fawzy Malouf:]

I'm wondering if you could just comment a little bit on the Alpine growth for next year. In that guidance that you've given, what's the implied growth there? And then with regards to helping out your utilization, are you getting the kind of traction that you need with regards to clients accepting part of their business to go to Alpine, so you can -- it seems pretty crucial for that to happen for you to get that utilization up above the 85% over time.

[Charles E. Sykes:]

Yes, Mike. I appreciate the questions. I hate it when you guys ask questions that I want to give you things specific, but the tendency is -- we don't break out offshoring, when we were doing offshoring and the growth rates with it, and it's a delivery capability. I will tell you that, as I said in my comments, it is significantly stronger than the overall growth of the company. So it is contributing its part and then some in moving the company forward. The second thing I would point out is that we see the strength of the Alpine platform not really as a stand-alone. But the beauty in it is when we're working with clients and they're all trying to build service segmentation strategies, much of which is based on leveraging new technologies that's coming out today, and it involves a human capital strategy, the types of people they want, so forth, many times that needs to be offshore. Many times that still needs to be in a brick-and-mortar domestic. But many times, the only way to scale and reach that human capital is through a virtual model. So the strength is really not that it's unbundled. The strength is that it's integrated with the overall company capabilities. And I would just point to the fact that it's not just a coincidence, and I think in the second half of the year, which got us about 10 to 11 months into the transition with the virtual platform with Alpine becoming part of the company, that we've suddenly seen our value proposition, I think, begin to resonate in the marketplace. And that's only going to get stronger. And it takes you a good 12 months to get our teams embracing it, and believing in it and seeing the capabilities. There's an educational curve, but I think you're going to continue to see that acceleration grow. So I apologize for not giving you a specific answer to your question with it, but I will just say generally, I'll answer it in the sense it is definitely considerably faster than the overall core. And again, we don't really see it as an unbundled solution. The strength of it is 1 plus 1 equals 3 in this case [indiscernible] color to that, but yes.

[Michael Fawzy Malouf:]

No, that's great. And then maybe just a little bit of a follow-up. I know that you have been talking about that 8% to 10% annual goal for operating margin for quite a while. Is it still reasonable to expect that the upper end of that range is doable? I know it seems likely that perhaps you could get to the low end, but the 10% seems to be -- you seem to need quite a bit of top line growth. And I'm just wondering, especially when you've given the guidance of fairly steady but mid-single-digit growth for next year, that perhaps that's not going to happen.

[Charles E. Sykes:]

Yes. It's -- that -- in the nature of us trying to be as transparent to everybody the way we communicate about our business, it's -- anyway, the 8% to 10% holds true. And to give you color on that though, again, for us being at our size, being at a $1.3 billion, I mean, we ought to be there. And the reason why I'm saying that is because when we first gave the transparency on what we expect this company to do, I think everyone needs to remember, we were a 4% to 5% margin company. And we were a 4% to 5% margin company based on the size that we were at that time. Prior to that, we were breakeven. We were breakeven because we were moving offshore and investing in the globalization of this industry, right? The reason why I point that out is that from that basis of running 4% to 6%, when we felt that we had things running pretty stable in this business. And the reason why I say pretty stable is because no matter how you want to spin it or look at it, this business always has some good things going on and some bad things going on. But unfortunately, it's that every so now and then, you might get disproportionate on one end or the other, okay? So when you're sitting at 4% to 6%, and people were saying, "Chuck, what can the margins get in this business?" We shared with them when we were a $600 million company that we could be 8% to 10%, but we reminded everybody that if we could keep the operations, productivity, G&A, the facility utilization in the current steady-state fashion at the time we were making this statement, you get about 40 basis of improvement. And if you just extrapolated out that model, it said, "Hey, when you get to be $1.2 billion to $1.3 billion, you ought to be running in the 8% to 10%." And the 8% to 10% is exactly what it is. If you look in our business, almost every quarter, Q1 versus Q2 versus Q4, you will see 2% margin swings. You'll see it for every company in the space. So in order for us to get into that 8% to 10% range, we believe we should be there now based on the way we've modeled the business. Now we came through the recession, we made some investments unique to Sykes. We had some acute issues around the world. We've addressed with it. We dealt with it. Now we are where we are, and we're still saying we ought to be at 8% to 10% where it is today. And by the way, with the revenue growth we're getting, I'm happy to see in our guidance we're getting that economy of scale that we ought to get, and we should be getting it faster than the 40 basis points. Why? Because we have things to still work on inside the company on the productivity and the facility utilization. That is the one caveat. All the margins that we were given, every time, it was at 85% facility utilization. So any time you see our numbers below 85% and you're hearing us saying, "We can get the margin up," that's a good sign, actually. If we are at 85% and we were telling you we could get our margins up, and we were sitting at that our guidance where we are, that would be a tougher hill to climb. So it just -- when you got the size and you go through some of the economic challenges that we've gone through with our clients and has dispersed, I mean, it takes a little bit to kind of climbed onto that -- out of the hole. But the fundamental structure of the business has not changed. And we are on the trajectory, and I think better yet, we're on the trajectory while investing in our business for differentiation. It is not because we are removing investment, cutting people and things. I think that's a really positive component of what's going on with our company right now. So we do have a lot of work to do. I mean, Mike, your question's right. I mean, the 10% -- and the 10% is not something, by the way, we're saying every quarter. What we're saying is today, we're showing in the 6s to getting into the 8, heck, maybe you hit a 9, but that's quarter-over-quarter. But we're not seeing 10% for the year, right? When we're saying 8% to 10%, we're just saying that Q1, Q2, Q3, Q4, when we get to that point, should range in that 8% to 10% range. We're not saying overall every year we'd be running at 10%. Just to give a little more color. I hope that helps.

[Operator:]

And our next question comes from Shlomo Rosenbaum from Stifel.

[Shlomo H. Rosenbaum:]

Chuck, I want to tell you -- just ask you -- you seem to be in a pretty good position right now vis-à-vis what we've seen in a long time in the industry in terms of dealing with a lot of growth. And most of the time, a lot of growth makes you -- basically, you have to decide between

[Charles E. Sykes:]

Shlomo, what I would say is that if you look at the way that we achieved the growth this year, I mean, so for the total year-over-year, as you guys know, I mean, it's 6%. In the second half, we're in 12% on a constant-currency basis. There's no doubt that yes, that holds you back from being able to very quickly get to maybe your maximum optimal margin. But do keep in mind, we still managed to improve our margin. I mean, with our guidance that we're doing for -- in '14 with our growth, it's getting us to a 100 basis point improvement guidance from where we ended the year, okay? So it is one of those things that we can still grow the company and grow in that range and still continue to get improvements of at least -- what I believe, what I'm saying is always 40 basis points, if it's at least $80 million, right? So the thing for us that makes it challenging, and I hate to find myself in the spot where you make comments and people come to me and say, "Well, you said you were going to do this and do this." Here's the problem with growth in this business. It isn't just the headline overall aggregate number. If you're growing -- again, years ago when we were talking about the business, we always said if you grew more than 8% in this business, it can begin to cause a little downward pressure on your margins. That doesn't mean you shouldn't do that. If it's good growth, and it's growth that we get our return on assets that we want to get, and it's with a client that we have trust in the long-term viability of their business, and it's growth requiring investments that is consistent with the way that we see the long-term trends of this industry evolving, we're going to do it. But if it's going to require us to go into a country we're not comfortable in, or maybe even invest for a client that we're a little concerned about their future, or the pricing they're putting on us or the terms or making the return on assets be suspect, we're not going to do it. So that has always been present. I think our actions that we took in Europe certainly speaks for itself. That's what we were doing. We sat there and we looked at it and we said, "We got to pull the trigger and make decisions." And we just made decisions that we don't think long term those markets were conducive for the success of our company. Doesn't mean someone else can't succeed there, but it wasn't right for us. And so we ended up [indiscernible]. So we are going to make the investments. But I want stay to the thing on growth, continuing to give color about the nature of the business, it isn't just saying you're growing double-digit that puts pressure on the margin. The most perfect growth we could have is if we were spreading it like peanut butter across every single vacant capacity seat that we have. That's a bit idealistic, unfortunately. The next level that happens is what if you're growing double-digit and it's not spreading like peanut butter, but it's also concentrated. That's kind of what we have going on right now. We had significant growth in the U.S. that required us to build seats where we didn't have capacity, and we had that growth going on in Europe, too. That's a good story for us. We ran our analysis. We said it's worth the investment. Let's do it. So it went against our filter. The third component is that if it's lumpy or concentrated, I should say, some of these programs were not just concentrated, but they were considerably more complex than what our normal implementations are. And so that's kind of added to a little bit more of an exacerbation, if you will, on our margin pressure for this year. But I don't want to set expectations that every time we're growing double-digit that it's always going to manifest itself like it is today. And it's something that is difficult for us to sit here and always say how the growth is going to occur every year. But we can always be selective, to your question, and we are, but we can't always be perhaps controlled in the sense of knowing exactly how that growth is going to occur. That one gets a little more complicated. So anyway, a lot of color, a lot of explanation with it, but I kind of hope it gives a little more context to the way we think about our business.

[Shlomo H. Rosenbaum:]

And then just in terms of the growth where it came from in the quarter. You had very strong growth in communications vertical, and the -- based on the numbers in AT&T, it seems like AT&T was a big portion of it. Can you talk about -- is there more than just AT&T growth in internationally? Are you getting more broad-based growth? Or is -- how much of your growth internationally came from getting one big client to move on to getting ramped up?

[Charles E. Sykes:]

Yes. Yes, I'll give general -- Mike can give you on the specifics with the numbers with it. But for us, remember, in the last few years as we've had conversations with all of you guys, we, as a company, have been focused on saying our growth is evolving from where it used -- it always be technology because that was our core. We then said, "Hey, we're really targeting telecom," and we felt like we've got an opportunity there. And once we broke in, we felt like we've got significant growth that we've got there. The third is that, hey, we think financial services is the place to get into, and we are in there with it. And we're seeing that growth occurring. Technology is kind of stable in this work where it is. Telecom is growing faster, and that was kind of expected. We also, at the same time -- remember, strategically, 2 years ago, 2.5 years ago, we said, "You know what, we got to get a little more customer-centric." I mean, we're getting to that size of a company where we got to get a little more focused around each one of these clients to make us flexible, more decisive and things. And I think we're starting to see that play out with some of our installed base. So that's kind of the story to me as to why that growth is occurring. Now to answer your question on how much is it a single client, in North America, we actually have a multitude of telecom clients and financial services clients that are growing. That's a great story, and that's where we are today. And I think that's indicative of the types of strategic initiatives we've done. Remember, in Europe, we exited 5 countries throughout our European operation that we had. We did that because we focused on the markets where we felt we had a competitive differentiation and we felt that we could grow better. And I'm happy to say that within that EMEA growth, you actually have a handful, it's not one, but it's not a dozen, companies in which we are generating that growth. And it is in, primarily, still in that telecom vertical, where again, is a competency of ours, that we felt like we wanted to take advantage of. So it's a good news story in that we're seeing the results of the strategic initiatives and decisions that we made 2 to 3 years ago coming in. I don't know if Mike maybe can give you specific numbers.

[W. Michael Kipphut:]

Yes. Just to give you a little more color, I think what you're asking is about European growth specifically, which is up about 32% year-over-year on a quarterly -- fourth quarter. And as Chuck pointed out, it's not only the communications vertical that's growing, but it's also financial services and transportation. But if you look at that 32% growth, even without that one large client win, it's still up 14%, 15% pretty easily. So it is pretty broad-based growth, and we expect to see that continue on in Europe at this point.

[Operator:]

[Operator Instructions] Our next question comes from Adam Doms [ph] from Baird.

[Unknown Analyst:]

My first question, if I can kind of follow up on the European growth that we were just talking about. Yield per seat in Europe has been up double-digits for the last 3 quarters. I'm kind of curious what's driving that. And do you see that as something sustainable?

[Charles E. Sykes:]

I'm sorry, what -- Adam, what's been up? I missed that.

[Unknown Analyst:]

The yield per seat, just sort of the revenue per seat in Europe?

[Charles E. Sykes:]

Oh, okay. Yes, so -- by the way, this is one reason why we've always stayed away from using this number because of the way I'm about to answer your question, all right? That has more to do with mix of business rather than -- as a company, we found some incredible way to yield productivity 10x out of our peer group, right? So -- when you're growing in the Scandinavian countries, just by the cost of doing business there that the revenue per person is considerably higher versus if we were growing in Europe and we were serving that growth out of our locations in Romania or in Eastern European locations such as -- same thing is true in the U.S., by the way. I mean, as we continue to grow domestically in the U.S. compared to when we were growing in the Philippines tremendously and growing in Central America, you'll see the revenue per person increase. But along that line, so does your G&A and everything, right? It all kind of adjust. So it's not always an indicator that you're going to have corresponding margin profile be significantly different. I don't know if that's why you're asking the question, but just...

[Unknown Analyst:]

No, that's perfect. That makes a lot of sense. And then one more quick question. You guys called out a net reduction of 1,200 seats for 2014. I was just wondering where you see that coming from.

[W. Michael Kipphut:]

Yes. It's -- the reduction is principally in the Asia-Pacific region. This is part of the production transfer that we spoke about last year. So as we go into the first quarter, although we said in our script that we anticipated some of this to occur in the fourth quarter, but it's actually coming to fruition in the first quarter. So we get some hangover from the previous year. But just to point out, overall, that we do, on a gross basis, anticipate adding approximately 1,200 seats, we do anticipate also taking out 2,400 seats. So it's a net overall reduction for the year of about 1,200 seats.

[Operator:]

And our next question once again comes from Shlomo Rosenbaum from Stifel.

[Shlomo H. Rosenbaum:]

I just wanted to follow up just in terms of the components of margin expansion and how you see that progressing through the year. You gave good color like 1Q, the seasonal aspect and then the lower days. But should we see like a big step-down in margin and then a step-down from there sequentially in the second quarter? Or how should we just envision this margin progression through the year?

[W. Michael Kipphut:]

Well, there should be a corresponding step-down in margin as you go from first quarter to second quarter. Recall also that we have less days that are being worked during that time frame as well. So if you look at, historically, what we did in the previous year, it's not too different as we see it as we go into the current year.

[Shlomo H. Rosenbaum:]

Okay. And then, just on a free cash flow basis, you were talking about potentially $9 million to, say, $14 million less of CapEx. Are there -- plus you're talking about expanding the margins 100 basis points. Should we see a significant improvement in the free cash flow this year? Or do you have any kind of thoughts of the way I should -- we should be modeling that?

[W. Michael Kipphut:]

Yes. The free cash flow should go up accordingly.

[Shlomo H. Rosenbaum:]

And are those the 2 components I should look at, basically net income improvement and reduction in CapEx and just flow that through?

[W. Michael Kipphut:]

Yes. That'd be perfect, Shlomo.

[Operator:]

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

[Charles E. Sykes:]

Great. All right. Well, thank you, everyone, as always for your time and your interest, and we look forward to connecting with you guys next quarter. Everybody, have a good day.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines. Thank you.