Sykes Enterprises, Incorporated
Q2 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Good day, and welcome to the Sykes Enterprise Second Quarter 2014 Financial Results Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. Management has asked me to relay to you that certain statements made during the course of this call, as they relate to the company's future business and financial performance, are forward-looking. Such statements contain information that is based on beliefs of management, as well as assumptions made by and the 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. Mr. Sykes, please go ahead.

[Charles E. Sykes:]

Thank you, Ed. And good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises Second Quarter 2014 Financial Results. Joining me on the call today is John Chapman, our Chief Financial Officer; and Subhaash Kumar, our Head of Investor Relations. Let me outline the format of our call today. I'll start with the highlights of our second quarter 2014 results, and touch on the overall state of the business, and discuss the 2 key items that impacted the quarter. After which, I will turn the call over to John Chapman, who will walk you through our financials, and then we'll open up the call to questions. Starting with the financial results. The second quarter was strong on a comparable basis. Revenue, operating margins and diluted earnings per share were all up nicely relative to the same period last year. Capacity utilization trended up. We generated robust cash flow from operations, which was up threefold from a year-ago; and was helped by solid operating performance. At the same time, we made sustained investments in our business to strengthen our footprint and deepen our vertical expertise, while paying down our credit facility. As we look out in our industry, net of the puts and takes, overall, the main trends remain healthy, which translates into continued business momentum. We are growing our existing clients and adding new marquee logos to our client portfolio, which validates our strong execution and our solid industry reputation. The wins we are capturing are primarily in the communications and technology verticals. In the technology vertical, for instance, we are now engaged with clients that are global market leaders in the platform software and hardware categories, while in the communications vertical, we are seeing opportunity enhancements on existing and new business with both telecom and cable providers. Although the health care and financial services verticals remain somewhat tepid, we are still achieving healthy growth overall on an enterprise basis. That is not to say that there are not and will not be one-off events and surprise us from time to time. But regardless, we continue to make forward progress in the growth and profitability of our business. On that note, as we discussed in the press release, there were 2 discrete factors that were a drag on our second quarter results. Let's first start with the timing issue. It is with the communications client, with which we have had a long-term relationship. We have been and continue to be one of the leading suppliers to the client, providing support across multiple lines of business and across multiple countries, mostly within the Americas region. Decline is in the midst of further vendor consolidation, and due to our strong and consistent operational performance, we are honored that we are now one of the preferred vendors that is the beneficiary of the client's vendor consolidation strategy, on certain lines of business. So where's the problem? Well in the second quarter, we were asked to maintain a certain level of agent staffing ahead of further volume growth resulting from the consolidation. However, due to unforeseen circumstances on the client's end, the anticipated volume did not materialize as predicted in the quarter. It has not only impacted revenues disproportionately in the second quarter, but also operating margins, as we were not able to flex our agent headcount real-time. But based on the daily and weekly demand trends we are currently seeing in the month of July, and now of course, into August, we now have a greater level of comfort that the event with the communications client was primarily timing-related in nature and contained to the second quarter. Let's now turn to the second discrete event. Although the impact from this event was less significant in the second quarter, it is expected to be a little more meaningful in the second half of 2014, and is reflected in our updated business outlook. It is an issue, in which impacts one of our financial services clients in the Asia-Pacific market. It is a client we have had for almost a decade, and was expected to grow to approximately 3% of our estimated 2014 revenues. We provide to the client both inbound and outbound services within the retail banking and credit card business segments. Due in part to recent regulatory changes in the client's market, together with an overhaul of the clients own compliance policies partly in response to the regulations, the intrinsic demand and profitability of the sell space program has swung dramatically, and are expected to be materially below targeted levels over the long term. So given the financial impact to our company and the increased level of scrutiny that the financial services firm in that market will be undergoing, due to the new regulations and compliance policies, we reached an amicable agreement with the client and will be winding down the program through the remainder of the year. However, it is our expectation at this time that the inbound programs will remain intact. In sum, with these 2 discrete events, we delivered solid comparable results in the second quarter. Now while the pace of revenue and margin expansion has moderated in 2014, the overall 8% to 10% long-term operating margin target remains intact and the expansion of our business continues, as we are seeing healthy momentum in demand from both existing and new clients. We also continue to prudently allocate resources to enhance our vertical, operations and leadership capability, by continuously evaluating all aspects of our company with the objective of making further improvements to our operations. We are focused on leveraging our virtual platform, rationalizing capacity and refining our cost structure. Granted we still have a ways to go in getting to our long-term target operating margins, but our progress is steadily moving forward and we remain steadfast in our belief that the actions we are taking are in the long-term interest of our company and our shareholders. So with that, I'd like to hand the call over to John Chapman. John?

[John Chapman:]

Thank you, Chuck. And good morning, everyone. On today's call, I'll focus my remarks on key P&L, cash flow and balance sheet highlights for the second quarter of 2014, after which I'll turn to the business outlook for the third quarter and full year. During the second quarter, revenues were up 5.2% at $320.5 million, which was at the bottom end of our $320 million to $325 million revenue range provided in our business outlook. The revenue delta was driven mainly by the timing and scope change issues we referred to in the press release and our prepared remarks. Second quarter revenue growth would have been at the top end of the outlook range, were it not for the aforementioned issues. By vertical, communications was up approximately 18% on a comparable basis; technology, up 15%; and transportation, up 6%; all of which was more than offset the lower demand from the financial services and health care verticals. Second quarter 2014 operating margin was 3.3% versus 1.8% in the same period last year. On a non-GAAP basis, second quarter 2014 operating margin increased to 4.7%, versus 3.7% in the same period last year, due to revenue growth and operating leverage, coupled with favorable foreign exchange impact, approximately 60 basis points favorable, all of which were partly offset by increased ramp cost through expected demand in the third quarter, coupled with the aforementioned timing and scope change issues. The timing and scope change issues had a negative impact of approximately 70 basis points on a combined basis. Second quarter 2014 diluted earnings per share increased 46.2% to $0.19 versus $0.13 in the comparable quarter last year, with the increase in the comparable basis, driven by revenue growth and expense leverage. On a non-GAAP basis, second quarter 2014 diluted earnings per share increased 22.7% to $0.27 versus $0.22 in the same period last year. Second quarter 2014 diluted earnings per share range provided in the company's May 2014 outlook were $0.25 to $0.27. Adjusting for the 29% tax rate provided in the business outlook, as well as the timing and scope change issues we referenced earlier, diluted earnings per share would have been at the top end of the range. Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 47% of total revenues during the quarter, up a shade from 46% in the same period last year, due to a slightly faster revenue growth from our top 10 clients relative to the consolidated revenue growth. We continue to have only one 10%-plus client, our largest client, AT&T, which represents multiple distinct contracts spread across 4 lines of business, accounted for 15% of revenues in the second quarter, up from 12.7% in the year-ago period. After AT&T, client concentration drops sharply. Our second largest client, which is in the financial services vertical represented 5.6% of revenues in the second quarter versus 6.2% in the same period last year, with the reductions driven by a program expiration. On a consolidated basis, during the quarter, the approximate net operating profit impact of all foreign currencies, including hedges, was approximately $1.8 million favorable over the comparable period last year and $1.2 million favorable sequentially. For the third quarter and second half of 2014, we are hedged approximately 80% and 80% at a weighted average rate of PHP 43.6 and PHP 44.17 to the U.S. dollar. In addition, our Costa Rica colon exposure for the third quarter and second half of 2014 is also hedged approximately 72% and 71% at a weighted average rate of CRC 520.11 and CRC 519.87 to the U.S. dollar. Now let's turn to select cash flow and balance sheet items. Net cash provided by operating activities was $23.2 million in the second quarter of 2014 versus $7.2 million in the same period last year. With the solid increase driven by a combination of higher net income, higher non-cash charges and changes in operating assets and liabilities. During the quarter, capital expenditures were $12.5 million. Our balance sheet at June 30 remains strong, with a total cash balance of $204.5 million, of which $187 million, or 91.4% of the cash balance, was held in international operations and may be subject to additional taxes if repatriated to the United States, including withholding tax applied by the country of origin and U.S. taxes on a dividend income. At June 30, we had $79 million of borrowings outstanding under our revolving senior credit facility, after paying down $17 million during the quarter. The amount available under our credit facility at quarter end was $166 million. Receivables were $283.5 million. Trade DSO on a consolidated basis for the second quarter were 75 days, down 1 day sequentially, and down 3 days comparably. The DSO was split 73 days for the Americas and 81 days for EMEA. Within the week after quarter end, the company collected roughly 5 days worth of DSOs. Depreciation and amortization totaled $15 million for the second quarter. Now let's review some seat count and capacity utilization metrics. On a consolidated basis, we ended second quarter with approximately 41,100 seats, up 800 seats comparably and down 100 sequentially. The comparable increase in seats was driven mainly by a combination of demand growth in EMEA and Americas region, which includes the entry into Colombia. On a sequential basis, the decline in seats is mainly in the Americas are the result of our ongoing capacity rationalization program related to excess capacity and facility transfers. The second quarter seat count can be further broken down to 34,800 in the Americas region and 6,300 in the EMEA region. Consolidated offshore seat count at the end of second quarter was approximately 22,200 or 54% of total seats. Capacity utilization rate at the end of second quarter of 2014 was 77% for the Americas region, 89% for the EMEA region. Utilization rate on a combined basis is 79%, up from 75% comparably and 76% sequentially. The increase in the consolidated capacity utilization rate on a comparable and sequential basis was due to a combination of current demand, aforementioned unanticipated issues in the second quarter, and the timing of agent ramps associated with forecasted seasonal demand growth in the third quarter of 2014. Now let's turn to the business outlook. First, underlying demand trends continued to remain healthy on balance. Demand growth from existing and new clients within the communications and technology verticals continues. Partly moderating these demand trends, near term however, are the previously mentioned timing and scope change issues. Although the scope change issue with our client within the financial services vertical is expected to additionally impact revenue and diluted earnings per share in the third and fourth quarters of 2014 as we wind down the program due to a lack of sustained demand and profitability, the delayed program ramp with our communications client is not expected to impact the third and fourth quarters of 2014 and the issue was merely timing. As a result of these factors, we anticipate the updated revenue range of $1.31 billion to $1.3 billion versus the previous outlook range provided in May 2014 of $1.32 billion to $1.335 billion. Similarly, we now anticipate a non-GAAP diluted earnings per share range of $1.34 to $1.41 versus the previous business outlook of $1.45 to $1.54. Second, our revenues and earnings per share assumptions for the third quarter and full year 2014 are based on foreign exchange rates as of July 2014. Therefore, the continued volatility in foreign exchange rates between the 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 third quarter and full year. Third, we plan to add approximately 900 seats in a gross basis in 2014 versus the 1,200 as previously planned, partly in light of the program exit with the above discussed financial services client. We added roughly 800 seats in the first half of 2014, including 200 in the second quarter, with the remaining 100 slated for the second half of 2014. Total seat count on a net basis for the full year, however, is now expected to decrease by approximately 1,500 seats versus the planned 1,200 seats, as we continue to rationalize excess capacity. Fourth, we anticipate interest and other expense of approximately $0.7 million for the third quarter and $1.9 million for the full year 2014, which includes interest expense related to the debt associated with the acquisition of Alpine Access. The updated interest and other expense amount excludes the potential impact of any unforecasted future foreign exchange gains or losses and other expense. And finally, we anticipate a slightly lower effective tax rate for the full year, compared to projections provided in the May business outlook, with the decrease driven chiefly by a shift in the geographic mix of earnings to lower rate jurisdictions. Considering the above factors, we anticipate the following financial results for the 3 months ending September 30, 2014. Revenues in the range of $328 million to $333 million, an effective tax rate of approximately 25%. On a non-GAAP basis, an effective tax rate of 27%, fully diluted share count of approximately 42.8 million, diluted earnings per share in the range of $0.28 to $0.31, non-GAAP diluted earnings per share in the range of $0.34 to $0.37, capital expenditures in the range of $18 million to $20 million. Considering the above factors, we anticipate the following financial results for the 12 months end December 31, 2014. Revenues in the range of $1.31 billion to $1.32 billion, effective tax rate of approximately 25%. On a non-GAAP basis, an effective tax rate of 27%, fully diluted share count of approximately 42.8 million, diluted earnings per share in the range of $1.08 to $1.15, non-GAAP diluted earnings per share in the range of $1.34 to $1.41, capital expenditures in the range of $48 million to $50 million. With that, I'd like to open the call for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Josh Vogel of Sidoti & Company.

[Josh Vogel:]

First question is around the program wind down you're talking about. I was curious, first, are there any other programs or clients at a risk -- that are at risk of this regulatory change? And then, could you also maybe walk us through how this move is going to end up being a $0.10 to $0.15 drag on EPS? It seems like they are about a $20 million to $25 million client on an annual basis and you're going to be scaling out of about 300 seats, and I was curious if I was looking at that correctly. And just lastly, you said, the inbound program's going to remain intact. So this is going to go from a 3% client to what? Sorry, I know that was a lot.

[Charles E. Sykes:]

Sorry, Josh, yes -- no, I know it's a lot of color, and we try to keep our scripts succinct and it's sometimes complicated to do. But -- so to answer your question, is there any other clients affected by it? The answer is no. Second of all, I think your question is how can a client of that size have that big of a material impact. And what I think is important is, as we commented, we've been serving this client for 10 years. And towards the end of last year, we were very fortunate to be awarded a very, very significant portion of this client's business. And they were outsourcing to us the majority of their customer service operations for this given market. So we were launching a very big program and that was both inbound and outbound, as I commented in my comments. To do that, we actually needed to open another facility expansion and it required us to do more than just the typical adding agents and training them. We did have some facility investments and things that we were making. So right when we where into launch and getting things up and going, new regulations came out, plus this company's own internal compliance arm of the business, really started taking a second look at the way that we had been -- we being collectively us and the client conducting a lot of those sales programs. And in the process of just trying to get more in sync with what they felt was in line with the regulations. What happened was it caused the dramatic negative impact on our profitability for the sales programs because as you guys know, most of the sales programs in this industry, you have a somewhat low base rate to kind of cover some portion of your cost, but then, a lot of the profit that you make is based off of the success. When the new regulations and new compliance policies came in, it dramatically impacted our ability to increase our close rates or to perform at the levels that we thought we would earn commissions. Again, we have a really good relationship with this client. So that dramatically affected the program to say, "Wait a minute, guys, we can't continue in this regulatory environment performing this way." It caused the client to really put a slowdown on the whole ramp, until we decided exactly what was going to end up happening. And that's where things just came to a halt. We're right in the midst of ramping. We had some G&A investments. All of a sudden, we come to a screeching halt. And now, I'm happy to report that, again, the amicable solution is to say, "Look, you guys take the sales program, manage it how you want, and then we're just going to focus on the inbound program and commence with our ramping." So that's why you have a rather small percentage affecting it in a dramatic way because it stopped the whole program. And in the end, it's just the sales programs that are going to go back. And then now, we're going to continue ramping. I know it's a lot of color with it, but that's the explanation for it.

[Josh Vogel:]

No, that's really helpful. That is helpful. Okay, so I just want to shift focus a little bit. When you're looking at the company as a whole, can you maybe discuss what percent of your portfolio that you would classify is not performing at your optimal target margins today? Because we're seeing good organic growth, capacity utilization improvement, but margins aren't really expanding in step with this.

[Charles E. Sykes:]

Yes. I know, while we're talking about these things, that the comments, that a lot of times people will make is they're going to -- "Come on guys, you always have puts and takes." And that's true. So in answering your question, I think it'd be really difficult for me to want to just go in and identify that level with it, for me, Josh. But I can tell that the ramp that we have going on right now, when you look at the growth rates that got into double digits in the last quarter we're under, and they're fairly significant. This program that we were just talking about for the financial services client was one of the significant programs. We have another one in Europe that's quite significant. If you recall, we had actually reached at one time in our European operations, almost in the 30-some-percent growth. And then, even here in the U.S. So what's happening right now is not so much of the underperforming meaning, we're not operationally performing what we should be doing well. It's more a matter that we haven't gotten our programs into the steady-state of these rather significant ramped programs that we're doing. So for our guidance, as we continue to go forward in Q3, Q4, when you look at our numbers, we anticipate as these big programs that we've been ramping, pretty acute ones, there's about 5 of them that are going on, when they get into their steady-state, you'll start seeing the gross margins start to come around. So it isn't necessarily that were looking at, saying, "Jeez, we have 4% or 5% of the portfolio, that's not performing." Well this is more a matter that we have around 5 very significant ramps right now that are going on that we just need to get those programs to steady-state. I hope that helps. John, I don't know if there's any commentary things that you would add, but...

[John Chapman:]

No, no, it's definitely -- the areas of the business that we've seen the significant growth in is where we're challenged to achieve where we want to be in the business. And as Chuck describes there's 4 or 5 programs across the globe. That's all into that category, Josh.

[Operator:]

Our next question comes from Howard Smith of First Analysis.

[Howard Smith:]

I wanted to follow-up on the kind of gross margin -- not gross margin -- overall operating margin target 8% to 10%, you had laid out last quarter some of the levers and timing of those to get there. I'm curious how something like this financial services program setback affects that? Is it something that's temporary for a quarter or 2, but it really doesn't affect the timing of getting to the 8% to 10%? Or does it push it out a quarter or 2? Just any color you can provide on that would be helpful.

[Charles E. Sykes:]

Yes, we see these types of events, Howard, in the instance with the first discrete area that we had talked about, we see it very -- being very acute to Q2. With the one with the financial services client, it is more affecting the guidance in Q3, Q4, which is why that updated up. It doesn't carry over into the next year or structurally change our business to say that our steady progress forward can't get to the 8% level on the low end with it. It doesn't change that. It does affect acutely for this year in Q2 and kind of bumps into Q3, bumps into Q4, in that regard.

[Howard Smith:]

But in terms of getting your leverage on SG&A and some of those other things, you'll just adjust the spend -- the more quarters you have to do that, you can just adjust the size, the company, overall. So it really doesn't impact a year out or so.

[Charles E. Sykes:]

Yes. And I think just to remind you and I guess, the folks listening on the call, when you think of those 3 levers and these are, again, just in directionally where we go, the growth in our business, I mean, for about every $80 million -- just to give you guys some targets and ratios you can look. For every $80 million in top line revenue, at the size of our company now, where we are today, you're probably looking and it could be as low as 20 basis points of improvement in overall margin, could be as high as 40. But I would say based on our size today, you're probably a little more skewed towards 20 basis points of improvement that we'd be able to get. When you look at facility utilization for every 10 percentage points -- now every time I say this, I always get careful about it because everybody's going to hang on to the 10% of what I'm about to say. But if you go from 65% to 75%, you get more leverage than if you go from 75% to 85%, right? So you kind of have the economy increases at a decreasing rate. But in general, for every 10 points, we will get 2.5 to 3 percentage points of improvement. And then, for productivity, which is really what we're talking about, our agents on the phone, for every 1% of utilization, now this becomes very important when we're on a ramp phase because you're not only are paying for your training, but even the agents are on phone, and based on the size and we haven't fine-tuned workforce management and so forth and so on, the utilization is a big number. For every 1%, it's about 80 basis points, so it's almost a 1 for 1 that you get. It has a pretty big impact. One thing I would like to call out is when we talk about facility utilization, 10 points being around 2.5 to 3 points. If you look quarter-over-quarter, Q2 from last year, Q2 this year, we increased 4 points. So if you just use that same ratio, that means we should have been about 1 point to a 1.2% higher in our operating margin. And we're kind of right in that zone, right? We're at 1 point. Now if you really want to scrutinize it, you may say, "Yes, but Chuck, come on, you had 60 basis points in improvement from FX." So if you strip out the FX benefit, but then if you add 70 basis points of what we're saying are 2 discrete areas that are a bit anomaly, you would have still been right at the 1% to 1.1%. So we use these ratios to test our own logic inside the company to make sure that we still see ourselves on the trajectory of getting better and better and better every quarter. That's the way we use that. So I just want to share that with you guys.

[Operator:]

Our next question comes from Kevin McVeigh of Macquarie.

[Kevin D. McVeigh:]

Any sense, Chuck, just opportunities, incremental opportunities you've been at a fair amount of consolidation obviously, one of your competitors. Does that free up some incremental market share for you? And then just amongst the broader space within telcos and just overall, any competitive advantages you can see out there, as we think about the consolidation phase that we're going through?

[Charles E. Sykes:]

Kevin, consolidation, you mean for the folks that are consolidating competitive benefits? Or you mean benefiting us?

[Kevin D. McVeigh:]

Benefiting you. On both sides kind of, you think about obviously, one of your competitors did a pretty sizable transaction. And then ultimately, you're seeing a lot of consolidation amongst the telcos and media and so on and so forth.

[Charles E. Sykes:]

Yes. Well, we have a lot of good competitors out there. So I think the fewer, the better, right, in the long term? And I think the consolidation candidly in that area, I think the consolidation helps the market. I think it helps all of us. And the reason for that is because we are seeing in our logic, when we are making our acquisitions, we have felt and continued to believe and I think this is why you're seeing the consolidation. Companies really need to be over $1 billion. Why? Because more and more of our clients continue to stay on the path of vendor consolidation. And when they do that, they're taking a gamble of managing risk, they -- you need to have a certain size for them to be comfortable to give you that much of their business. So I think that's why you're seeing our consolidation, particularly for companies that are under $1 billion. I think you're seeing them being acquired or merged in that case. Now in the end, I think that helps us because I think it gives a little more bottom line protection on pricing, people don't quite get backed in a corner and do irrational things in that regards. So I think that helps us long-term, for us as a business. I do see candidly, most of these acquisitions as being more financially strategically driven, not really revenue strategies. Now I know every company that makes the acquisition would see that a little differently because in some cases, it gives them a presence in the market that they wanted. Just like for SYKES. ICT strengthened our telco and strengthened our financial services verticals. But I don't really wake up today at Sykes Enterprises and say, because these companies are bigger, they're now a big competitive threat to us. I still respect them as competitors, just like I did before the transaction. So I think in the end, it's just going to strengthen the overall marketplace, with pricing and just fewer competitors, the way I see it. I don't know, John, if you've got comments or views, but...

[John Chapman:]

No, no.

[Kevin D. McVeigh:]

And as you think about kind of 2 things, Chuck, where are we on the vendor consolidation, in terms of incremental market share for you? And then just openly, have you started to see the benefit on the pricing front?

[Charles E. Sykes:]

It's interesting. I can't say today, I'm seeing that. I think that's something that is going to manifest itself as we see our contracts coming up for renewal. So if every contract was coming up for renewal today, and we were competitively pricing against all of these companies, I could probably answer that, Kevin. But I just think as the years go by, and we're having to renew our pricing and all, I think we're going to see more stability in that regard, going forward. In terms of the market share impact, it's still a really big market. It is amazing, the number of companies. We really only kind of talk about the 12 typical competitors that were around. Maybe there's 12 to 15, but if you really research the market, there are hundreds of companies that are in this space. So it's going to take a lot of consolidation to really move the needle to where I think someone gets more than 5% or 6% market share. So I still think there's quite a bit of consolidation that's going to need to take place to ever move it that much.

[Operator:]

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

[Ross Licero:]

This is Ross Licero on for Mike. Could you -- it looks like in the Americas, the revenue per occupied seat has been down the last couple of quarters. Could you give some color on what's driving that?

[Charles E. Sykes:]

Yes. Well, the thing on the revenue per occupied seat, what would be affecting -- be affecting that for us is when you look at the timing of ramping our business -- so for instance, if you look at on the net seat basis, we were saying for the year, that we're going to be reducing 1,500 seats, but yet, we're adding a gross of 900 seats. So that means we're taking out 2,400 seats, all at the same time. If you look at the timing of those things, when those seats are coming on and when they're coming off, that can throw off the way that ratio looks. Now the other thing that happened particularly in Q2 with the discrete event, is that it wasn't just volume related, we actually had with our customer, there was a big, big strategic push to reduce handle time. And when we ended up reducing handle time, handle times came down about 20%, which would be almost like just the volume reducing 20%. And as a result of that, we have been picking up more of the remaining business and becoming -- taking account share in that client. So you will get some anomalies from time to time, yet suddenly, you saw your handle time minutes. And if you remember, in the commentary, what affected us is that the minutes went down, but since we were picking up additional business, we didn't get rid of the agents, all right? We ended up holding on to the agents, so that we could absorb the consolidation that was taking place. And that will carry on in the second quarter. So that definitely would have been affecting the revenue effectively per occupied seat, that you're going to see. I don't know if John has anything...

[John Chapman:]

It's [indiscernible] to watch because we give utilization at the end of the quarter, so you can get distortions during the quarter that can impact that number as well.

[Ross Licero:]

Okay, great. And then just one more. The incremental 300 seats that you're going to lose this year. Are those all coming from -- or for the most part, coming from the EMEA region?

[John Chapman:]

The seat reductions are in the Americas.

[Charles E. Sykes:]

Yes. And we've got -- for the year, just to make sure, for the year, we're going to have a net reduction of 1,500.

[Ross Licero:]

Right. But you had 1,200, so I was asking about the...

[Charles E. Sykes:]

Oh, yes, yes, yes. We're the 300 change. That's actually in relationship with the financial services client...

[John Chapman:]

The financial services client.

[Charles E. Sykes:]

The financial services client, where we were expanding to do the total inbound program and outbound programs and investing in G&A. We're now going to get rid of those seats. We were going to be...

[Operator:]

Our next question comes from Bill Warmington of Wells Fargo.

[William A. Warmington:]

So first question is, what will it take to replace the lost revenue? And how long will it take?

[Charles E. Sykes:]

To replace the lost revenue? The lost revenue...

[William A. Warmington:]

From the discontinued program at the Asian financial services company.

[Charles E. Sykes:]

Yes. We're probably -- I mean, for us -- I mean, if you look on the revenue for just for net size, probably in the pace of our growth. I even into next year, you're looking at the first 6 months we've built to get it replaced. If you look at it purely on a revenue basis. But the other thing on that program we'll be able to do is to ratchet in some of the G&A investments and things, so we can take some action obviously to mitigate the impact of the revenue reduction. To answer your question, just at our growth rate that we typically have been experiencing, probably looking at about 6 months.

[William A. Warmington:]

Okay. And then, on the margin side, I wanted to ask, what has the incremental margin on your existing book of business been running? So when you generate $1 from your existing book, what's the margin on that?

[Charles E. Sykes:]

Think about how to answer that question, to break that out.

[William A. Warmington:]

The reason I'm asking is I'm trying to get a sense for what it's going to take to get you to that 8% to 10% range, how long that's likely to take?

[Charles E. Sykes:]

Yes. Yes. Well, we got into this last quarter. If you look at the 3 levers, all right, just growth, which gives you economy of scale in your fixed overhead or your corporate more or less. The facility utilization and the productivity, again, some issues that we're talking about, these are acute to SYKES and what we're doing with. But if you just look at it purely on growth, you're probably looking at a 2.5 year trajectory. But that's not the only lever that we're working on right now. The facility utilization is going to get us a big lever. And we're already seeing that, as we're moving, going from 75% to 79% utilization. So that will reduce that 2.5-year window time frame. And then the productivity in getting the 5 programs up to speed, as we look at that. But for us, we discontinued -- here is the challenge, of course -- I'm giving you the 3 levers and if -- but as -- as you're seeing in this quarter that we have today, it isn't like every quarter there's not a few bumps we hit in the road, but you can recoup it pretty quick. As you get back into getting things -- your legs underneath you, so to speak. So I don't know how to break it out from the standpoint of just steady-state. I mean, if we went out and just ratcheted, no growth and just hunkered down right now where we are, you could see the margins come in to the 8%. But then, you would not be growing anymore from there. So I think the one key message -- I don't know if this is where you were driving at, the one key message is that, we don't need to get to the 8% by focusing on one lever called growth. I think that's the key messaging. That is -- that is not really where our focus is. It's certainly helps in growing -- gives us opportunity to put our facilities to work and continue to get leverage. But that is not the one and only lever that we need in order to get to it.

[Operator:]

Our next question comes from Dave Koning of Baird.

[David J. Koning:]

Yes, I was just -- I guess wondering with the guidance that the EPS range got brought down about $0.12 or so at the midpoint. Revenue only got brought down mildly, and if we just kind of use the normal margin range on that revenue, it would seem like you'd only have guided down a couple of cents on EPS, rather than $0.12. So implicitly, you're kind of reducing your margin guidance for the year. I'm just kind of wondering, kind of what the thought process is on that side of it?

[John Chapman:]

Yes, I think, David, it's really the acuteness of the issue that Chuck described in this area where we built G&A capacity out, we're building programs up. And now we've got a really significant change in the sales program that were -- that really, you're absolutely right, in terms of the revenue reduction that we've got, we've got a very disproportionate impact to our EPS. But all of that is, due to that one single issue that we're unwinding during Q3 and Q4. It does look dramatic, but that's exactly what is the scale of the change from where we were and where we expect it to be in those programs, to where they are today.

[David J. Koning:]

Got you. Okay. And then, from a utilization standpoint, utilization was actually very, very high in Q2. And normally your margins are high. Is it just that the utilization rate is calculated based on used seats, which are paid for seats, which means sometimes you can have high utilization if you're just paying people, but if the revenue's not coming through, is that the problem really?

[John Chapman:]

Yes, if you think of Q2 with the 2 discrete issues. One, we had people in seats that were not as productive because the volumes didn't come as a result of the handle time reductions. That impacted us and in the financial services, we've got a program that technically has got utilized seats, but actually, was taking money away from our bottom line. So those 2 issues combined had an impact versus what you would normally see, which is utilization increase, nice hit to the bottom line. We -- that effectively hurt us in Q2.

[Charles E. Sykes:]

And Dave, I think too, when you're looking at the utilization impact, not that you're not doing this, but it's really important that you look at the effect of utilization on operating margins on a comparable basis, not really on a sequential basis because every quarter, as you know, Q2, we had 10% fewer workdays and just a lot of things going on. So we always look at it quarter-over-quarter. I think the other thing is, just, again, forgetting where Sykes Enterprises was, we're not achieving facility utilization increases by just simply adding 900 seats this year. We're adding 900 seats, but we're also removing 2,400 seats. And that does take some effort. So even with all of that movement that's happening in there, we're still seeing the direction, the trajectory of the margin coming around on a comparable basis.

[Operator:]

[Operator Instructions] Our next question is from Shlomo Rosenbaum of Stifel.

[Josh James:]

This is actually Josh James filling in for Shlomo. I just wanted to ask, should we expect a wind down of the program with the financial services client to impact the last 2 quarters of 2014 equally? Or will one quarter be affected more than the other?

[John Chapman:]

I would expect they're pretty even between Q3 and Q4.

[Operator:]

[Operator Instructions] At this time, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sykes for any closing remarks.

[Charles E. Sykes:]

All right, Ed. Thank you so much. And I don't have any closing remarks, other than, as usual, just to say thank you for your interest in the company, and for all of your questions. We look forward to updating you guys in our next quarter. Everybody, have a good day. Thank you.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.