Sykes Enterprises, Incorporated
Q4 2014 Earnings Call Transcript

Published: 17 Feb 2015

[Operator:]

Good morning, and welcome, to the Sykes Enterprises Fourth Quarter 2014 Financial Results Conference Call. [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 the beliefs of management, as well as assumptions made by, and information currently available to, management. Phrases such as our goal, we anticipate, we expect, and similar expressions, as they relate to the company, are intended to identify forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and in the company's Form 10-K and other filings with the SEC from time to time. I would now like to turn the call over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

[Charles Sykes:]

Thank you, Denise and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises fourth quarter 2014 financial results. Joining me on the call today are John Chapman, our Chief Financial Officer; and Subhaash Kumar, our Head of Investor Relations. On today's call, I will provide a quick summary of our operating results, after which I will turn the call over to John who will walk you through our financials and then we'll open up the call to questions. Let me begin by saying that our fourth quarter 2014 financial results marked the strong year to the year. We made considerable financial progress since the second quarter trough [ph] thanks to the hard work of our frontline agents and our leadership team worldwide we demonstrated a level of operational readiness that enabled us to drive a healthy level of revenue growth while expanding operating margins. Fourth quarter revenue increased 7.6% comparably on a constant-currency basis. Growth remained fairly broad, even among our top 50 clients which represent more than 85% of revenues. The solid revenue growth in the quarter is a testament to our execution and differentiation in the market place. We saw good demand from clients within our communications vertical in particular as I have discussed over the last several quarters the competitive dynamics within the telecom sector coupled with our abilities to draw tangible business impact for our clients is allowing us to capitalize on both the growth opportunities and take share from competitors within the industry. The technology vertical, another success story for us saw solid inroads as we ramped up gains with new clients in that vertical while taking share away from other vendors, both of those verticals offset the temporary [ph] demand within the financial services and transportation verticals. But, as you may have recalled we recently appointed Drew Blanchard, the head of financial services, healthcare and retail verticals and we certainly look forward to seeing progress on that front. The margin story in the fourth quarter was one of validation, for it demonstrated that the structural integrity of our company is intact. Gross margins in the quarter were at 34.9%, this was the highest gross margin levels since the fourth quarter of 2011. Similarly, our non-GAAP operating margins were up comparably at 9.6%, levels we have not seen since the third quarter of 2009. The main driver of margin performance during the quarter was strong productivity gains across the board achieved by continuous process improvement in our business. Finally, non-GAAP diluted earnings per share increased approximately 68% to $0.55, more than seven fold relatively to constant currency revenue growth. The earnings growth is a direct result of the operating leverage within our model, we also delivered strong annual operating cash flow of roughly $94 million in 2014 versus $86 million in 2013, which enabled us to strengthen our core business and return cash to shareholders. As we look out into 2015 we continue to see opportunities in the market place and we are well positioned to capitalize on them. The demand trends we saw in 2014 remain largely in place driven by the secular trends towards outsourcing and to play a competitive dynamics within each of our verticals and vendor consolidation. Striking [ph] out the foreign exchange impact and the exit of sub profitable programs, we are on track to deliver respectable constant currency revenue growth. Similarly our 2015 business outlook is implying solid operating margin expansion, while we still have a lot of work ahead to reach our long term margin target, we believe we are on the right track and by sustaining our investments and strengthening the core of our business, organizing around our clients, building vertical demand expertise, and innovating our delivery platform we can ultimately drive results for our clients, generate opportunities for our employees and earn lot value for our shareholders. With that, I’d like to hand the call over to John Chapman. John?

[John Chapman:]

Thank you, Chuck, and good morning, everyone. On today's call, I will focus my remarks on key P&L, cash flow and balance sheet highlights for the fourth quarter of 2014, after which I will turn to the business outlook for the first quarter and full year 2015. During the fourth quarter, reported revenues were up 4.3% to $349.9 million. They were at the top end of their revenue range of $345 million to $350 million provided in our business outlook despite the roughly $5.4 million headwind from foreign exchange. So relative to the business outlook of $345 million to $350 million in revenues, and on a constant-currency basis we saw better demand with certain clients, particularly in technology, financial services, healthcare and communication verticals. By vertical market, on a year-over-year basis, technology was up 27% on a comparable basis, healthcare up 8% and communications was up 6%, all of which more than offset demand softness from the financial services, and transportation verticals. Fourth quarter 2014 operating margin was 9.3% versus 5.7% in the same period last year, with the fourth quarter 2014 operating margin reflecting 70 basis points of contribution related to pre-tax gain of $2.6 million on the sale of a facility closed in the third quarter of 2013 as part of the capacity rationalization program. On a non-GAAP basis, which excludes the gain on the facility sale, fourth quarter 2014 operating margin increased to 9.6% versus 7.1% in the same period last year, primarily driven by higher revenue, improved capacity utilization and better expense leverage, coupled with a favorable foreign exchange impact of approximately 80 basis points. Fourth quarter 2014 diluted earnings per share were $0.53 versus $0.26 in the comparable quarter last year, with the increase due principally to the aforementioned factors, as well as the contribution of approximately $0.04 in diluted earnings per share from the facility sale, coupled with a lower effective tax rate. On a non-GAAP basis, which excludes the facility sale, fourth quarter 2014 diluted earnings per share increased to $0.55 from $0.33 in the same period last year with the comparable increase driven largely by the previously-mentioned factors. Fourth quarter 2014 diluted earnings per share were also higher relative to the November 2014 business outlook range of $0.50 to $0.54 also driven by the factors previously discussed. Adjusting for the non-GAAP effective tax rate of 25% as projected in the November 2014 outlook, and forecasted interest and other expenses of $0.8 million, fourth quarter 2014 diluted earnings per share would have been $0.58 due to higher demand, increased agent productivity and G&A leverage. Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 48% of total revenues during the fourth quarter of 2014, up from 46% in the same period last year due to growth within several of our Top 10 clients within the communications and technology vertical. We continue to have only 1 10%-plus client, our largest client AT&T, which represents multiple distinct contracts spread across 4 lines of business, represented 17.8% of revenues in the fourth quarter of 2014, up from 13.8% in the year-ago period. After AT&T, client concentration dropped sharply. Our second largest client, which is in the financial services vertical, represented only 4.7% of revenues in the fourth quarter versus 5.8% in the same period last year. The percent of decrease came largely from a program [ph] intrusion. 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 roughly $400,000 favorable sequentially. For the first quarter and full year 2015, we are hedged approximately 84% at a weighted average rate of PHP 44.07 to the U.S. dollar and 75% at PHP 44.05 to the U.S. dollar respectively. In addition our Costa Rican colon exposure for the first quarter and full year 2015 is also hedged 79% at a weighted average rate of CRC 558.81 to U.S. dollar and 76% at CRC 560.53 to U.S. dollar respectively. Now let me turn to select cash flow and balance sheet items. Net cash provided by operating activities in the fourth quarter was $27.6 million versus $35.7 million in the year-ago quarter, with significantly higher net income from operations offset by timing related changes in working capital. During the quarter, capital expenditures were $9 million. Our balance sheet at December 31, 2014 remained strong with a total cash balance of $215.1 million, of which $194.4 million or 90.3% 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 the dividend income. At December 31, 2014 we had $75 million of borrowings outstanding with $170 million available under our revolving senior credit facility. In the fourth quarter of 2014, we repurchased approximately 362,000 shares or I thought was 630,000 shares for the year at an average price of approximately $19.92 per share. We have 1 million shares remaining of our 5 million repurchase programs authorized in August 2011 [ph]. Receivables were $290.4 million. Trade DSOs on a consolidated basis for the fourth quarter were 76 days, up 1 day sequentially and down 1 day comparably. The DSO was split between 74 days for the Americas region and 81 days for EMEA. We collected roughly 10 days worth of receivables shortly after year end. Depreciation and amortization totaled $14.6 million for the fourth quarter. Now I would like to turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended the fourth quarter with approximately 41,000 seats, down 1,200 seats comparably and unchanged sequentially. Comparable decrease in seats was due to ongoing facility rationalization which was more than offset capacity expansion in the EMEA region. The fourth quarter seat count can be further broken down 34,500 in the Americas region and 6,500 in the EMEA region. Capacity utilization rates at the end of the fourth quarter of 2014 were 77% for the Americas region and 90% for the EMEA region versus 70% for Americas and 87% for EMEA in the year-ago quarter. Capacity utilization rates on a combined basis was 79%, up from 73% comparably and unchanged sequentially. The increase in the consolidated capacity utilization rate on a comparable basis was driven by higher demand and capacity rationalization. Now I would like to turn to the business outlook. The assumptions driving the business outlook for the first quarter and full year 2015 are as follows. We continued to experience healthy demand from clients within the communication and technology vertical. In addition, based on early indications, we anticipate some firming of demand within the financial services vertical. As in prior years, with fewer work days in the second quarter, coupled with the timing of seat additions and ramps related to program wins, we expect consolidated second-half 2015 revenues to be greater than the first-half. Furthermore, based on foreign exchange rates as of February 2015, the full-year business outlook reflects the anticipation of approximately $50 million in negative impact to revenues due to unfavorable foreign currency movements relative to 2014. In addition, we have already eliminated certain sub-profitable programs, which are expected to incrementally impact 2015 revenues by approximately $25 million. Despite the foreign exchange impact of 2015 revenues, we expect expansion of operating margins. However, consistent with prior years, operating margins as well as diluted earnings per share are expected to be higher in the second half of 2015 relative to the first-half. Our revenues and earnings per share assumptions for the first quarter and full year 2015 are based on foreign exchange rates as of February 2015. 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 and both GAAP and non-GAAP earnings per share relative to the business outlook for the first quarter and full-year as discussed above. Second, we plan to add approximately 1,700 seats on a gross basis in 2015 to support client program expansions. More than three-quarters of the seat additions are expected to occur in the first half of 2015. On a net basis, however, we anticipate 2015 seat count to remain unchanged relative to 2014 as we plan to rationalize roughly 1,700 seats. Third, we anticipate net interest expense of approximately $0.7 million for the first quarter and $2.8 million for the full year. These amounts exclude the potential impact of any future foreign exchange gains or losses and other expense. And finally, we anticipate a slightly higher effective tax rate for full-year 2015 versus 2014 with the effective tax rate differential driven chiefly by a shift in the geographic mix of earnings to higher tax rate jurisdictions. Considering the above factors, we anticipate the following financial results for the three months ending March 31, 2015. Revenues in the range of $315 million to $320 million, effective tax rate of approximately 27%; on a non-GAAP basis, an effective tax rate of approximately 28%, fully diluted share count of approximately $42.5 million, diluted earnings per share of approximately $0.27 to $0.30, non-GAAP diluted earnings per share in the range of $0.33 to $0.36, capital expenditures in the range of $14 million to $16 million. For the 12-months ending December 31, 2015, we anticipate the following financial results. Revenues in the range of $1.3 billion to $1.32 billion; an effective tax rate of approximately 26%; on a non-GAAP basis, an effective tax rate of approximately 28%; fully diluted share count of approximately 42.9 million; diluted earnings per share of approximately $1.34 to $1.46; non-GAAP diluted earnings per share in the range of $1.56 to $1.68; capital expenditures in the range of $55 million to $60 million. With that, I'd like to open the call up for questions. Operator?

[Operator:]

Thank you, Mr. Chapman. [Operator Instructions] And our first question will come from Bill Warmington of Wells Fargo. Please go ahead.

[Unidentified Analyst:]

Hi, this is Bill Johnson [Ph] on for Bill Warmington.

[Charles Sykes:]

Hi, Bill.

[Unidentified Analyst:]

How’s it going guys? I just have a few questions for you. In 2014 you added about 1,800 seats and I think took down about 3000. I mean for 2015 you are planning on adding 1,700 seats and taking down 1,700, so what’s driving the significant year-over-year growth in CapEx there?

[John Chapman:]

In terms of the CapEx spend I mean last year it was around 3.4. We are increasing in 2015 bar [ph] we’ve got – we describe it as discrete event unrelated to seat count. We’re actually embarking on ERP replacement project. And in terms of the guidance in 2015 you would really look out something like $8 million of that guidance being related to the ERP replacement.

[Charles Sykes:]

Yeah, Bill the other thing that we are doing is taking the virtual platform that we’ve been investing in and we’re preparing it now for global launch. So we’re also doing some IT investment there.

[Unidentified Analyst:]

Okay, great. And it looks like you have the financial services vertical, it’s been bit of a drag for the second half of 2014, what’s behind that and what’s driving your outlook for firming demand in 2015?

[Charles Sykes:]

Yes, the financial service side is we understand has given some difficulty comps there. The driver for that, there’s really the main thing is that it’s related to M&A activity within several of the banking customers that we were serving. So we had four of our clients that actually had sold off some of their legacy asset mortgaging service portfolio. And that was business that we had been handling for almost 100% for many of them. So the companies that acquired that from them took all of that business in-house. They did not outsource it, so we ended up losing that. The other thing is that we had one of our banking clients that actually acquired another bank and in the process around themselves are going to Philippines with a lot of extra capacity of the facility that they own. So they had made the decision to just, it was better for them if they just used that facility utilization and put it to work. So they have taken some of the work out of our portfolio. We still have the relationship with all of these banks, it’s just that portion, but it was pretty significant. So the reason why we are positive on the outlook for this that those were just unique events that we understand why the banks were making those decisions and we’re still growing with these banks. So I think as we go forward into 2015 the comps will change and you will start seeing financial services growing again for us.

[Unidentified Analyst:]

All right, got it. Thank you guys.

[Charles Sykes:]

Thank you.

[Operator:]

The next question will come from Mike Malouf of Craig-Hallum Capital Group. Please go ahead.

[Michael Malouf:]

Great. Thanks for taking my questions. Hi guys.

[Charles Sykes:]

Hey , Mike.

[Michael Malouf:]

Can you know $25 million is obviously a lot of money on a program that’s not making very much money? How is the mix at the lower end of your profitability, do we have a few more of these sort of that you are working through that we need to try to get up into the profitability side or we’re going to let those go throughout 2015, can you give us just a little bit of color on that risk?

[John Chapman:]

Yeah, Mike so the thing that – not go over this too much with it, but obviously we believe we need to be running the company 8% to 10%. And if you recall, we’ve gone through 2012, 4.7% to 5.7% to 7%, so we’re making the progress and we’re getting to where we need to be. The challenge is that even in the range of running 8% to 10% at any given time if you were to look over our 200 plus customers in our portfolio, I think it’s fair to say that we probably always have at any given 10% of them that are not performing the way that we have like for them perform. Now understand sometimes that’s our own fault. We may not be executing the way that we need to be executing. But some times that portfolio we come to realization, as some times our clients are struggling too. And its not execution issues on our part and its terms in the contracts that have change or it something inherent that is changing your business that just not allowing us to make the margins. And it isn’t easy for us to go and get rid of these clients, because its hard to hold on to, but normally we have other circumstances, I’ll give you an example, let’s say that we’re in a marketplace where we’re not too crazy about trying to expand and add new centers, but we have enough sales pipeline that we could use those seats that are sub-profitable for someone that would hit our target margins. And we have a customer that maybe just wanting to continue to have a price decrease even that we’re already struggling. And sometimes you just hit that fork in the road where you have to make a decision. So, that’s what happened here. And it’s not something that’s happens frequently, but it is something that happens from time-to-time. So, but answer to your question, I mean, at any point in time, yeah, we probably have 10% of the portfolio that we would like to see performing better. But that’s inherent, I promise you and everybody in the industry for the most part. I would be surprised if its not…

[Michael Malouf:]

No. I can imagine. Thanks for the color on that. Then one quick question for John; this what relates to the balance sheet, $195 million in cash held overseas. Can you just – I know, you’ve assets in the past, but I was wondering if there’s any change with regards to the strategy or uses of that cash or have to thought more since been on board for a while now, what we can do to get some value out of that cash for shareholders? Thanks.

[John Chapman:]

No. I think at the moment the strategies unchanged and we are growing in foreign operations. We do look opportunities to use some of that cash and as we stand today, no change to our assertion on that cash being permanently invested abroad?

[Michael Malouf:]

Okay. Great. Thanks a lot. Appreciate it.

[Operator:]

The next question will come from Dave Koning of Robert W. Baird. Please go ahead.

[Dave Koning:]

Yes. Hey, guys. Good morning.

[Charles Sykes:]

Hey, Dave.

[Dave Koning:]

Yes. I guess my question just Q1 guidance. Typically Q1 is kind of flattish sequentially or sometimes down a little bit like one, I guess 3% last year, but not down too much. And you’re guiding to down 10% sequentially in, I guess – I get the sequential currency obviously is a big part of that. But is the rest of it – that the $25 million of annual contracts that are de-converting, I mean, should we think of that is kind of January 1, was kind of when those de-converted, so sequentially that’s kind of the rest of that, kind of big sequential decline?

[John Chapman:]

Yes, Dave. You take that equally over all four quarters and when back out the FX and you back out the sub-optimal, we are looking at our guidance being anything from 3.4% to 6.7% revenue growth year-over-year.

[Dave Koning:]

Got you. And I’m thinking more sequentially, Q1 is just – is such anomaly this year, but I think its because the sequential movement from $350 million of revenues in Q4, usually Q1 would be pretty similar to that $350, but you’re only guiding I think $315 to $320, and I think that full contemplated in currency down sequentially and then if its all four quarters, there’ll be a $6 million sequential decline from the de-conversions?

[John Chapman:]

Yes. It’s $6 million.

[Dave Koning:]

And there is nothing else in sequential movements. It’s really those two factors?

[Charles Sykes:]

No. There isn’t.

[Dave Koning:]

Okay.

[Charles Sykes:]

I think David, if you look back in the last quarter, if you look at constant currency and everything, we saw actually it was flat. It is typically the flat or a little declining in the history. So it’s not dampening even normally if you take into to account the FX and the sub-profitable program, it just the timing of the revenue on that quarter probably with that sub-profitable program coming out.

[Dave Koning:]

Yes. That’s totally make sense. The other think I guess, margins these year it looks like the kind of the guidance is kind of setting of for 7.5% or margins kind of in that ballpark, which is getting to close to you’re – the higher end of kind of historical ranges. Is there any else – you’ve done a great job kind of cutting cost, getting rid of sub-optimal regions et cetera. Are we kind of that getting close to kind of a normalized place where there’s not a lot else to cut, nor we should just see the leverage in the business as you grow revenue that were in a pretty normalized environment now?

[Charles Sykes:]

Yes. We are, Dave. It’s – and just to give you some indicators of that. You typically shouldn’t see from us we’re adding like last year, gentlemen asked the question previously, we added 3,000 seats, took out 1800. This year we’re saying 1700 and taken out 1700. Part of the challenge is everyone that’s been following the dialogue here for the last several quarters is we’re needing to get our capacity in the right location for the current clients and where we see the growth opportunity. So, that’s why you’re having to see us add -- spent money to add seats and at the same time it does cost money even get rid of them. So as you go forward you should start seeing a little more of -- if there’s growth it’s more to skewed on the side that 70% of all the activities purely related adding seats and you don’t have a lot of taking out seats. And so we’re getting back, we’re getting back to that more normalized operational mode.

[Dave Koning:]

Got you. And my final question, just in terms of seats it sounds like net pretty stable with the $41 million that you ended 2014 with, is there going to be any like disperse in geographically from that like is offshore still growing or EMEA growing or should we just kind of model every component of the business pretty stable?

[Charles Sykes:]

We’re right now out of all the activity that we have gone on; the irony is that both the addition and the reductions are really almost like 90% occurring in the Americas. The majority of that activity from the standpoint of additions and removals is actually in United States. The other places where we’re adding seats and we’re not removing seats, we’re adding seats in the Philippines, we’re adding seats in Central America. But in the U.S. that’s where we had – I will use the term a little bit of a misalignment in the some of the label markets and places where we ended up having centers. They’re just not conducive to the opportunities that we have today that we see going forward. So, Europe pretty steady right now, I mean, we’ve got good facility, utilization there and there we’re making additions as well, but we’ll be in very smart and smart targeted growth. But we don’t have a lot of noise in Europe anymore and I haven’t to remove seats and add seats, we’re just growing.

[Dave Koning:]

Okay. Thank you. Good job.

[Charles Sykes:]

Thank you.

[Operator:]

The next question will come from Kevin McVeigh of Macquarie Capital. Please go ahead.

[Kevin McVeigh:]

Thanks. And color on the guide was very helpful. Could you give us a sense of that $25 million how does that impact the margins in 2015 in terms of what’s the benefit from rationalizing those $25 million and how does that compared to what the total amount rationalized in 2014 was? Any sensitivity around the margin as well would be helpful?

[John Chapman:]

To be honest, the $25 million coming out, didn’t really move the margin much, a small amount, but really relatively insignificant amount in terms of the operating margin change because of the $25 million. Yes. It really didn’t move.

[Charles Sykes:]

Yes. Kevin, and the thing that was going on with the $25 and there -- it wasn’t necessarily just by taking care of that, we are going to end up seeing the big improvement, because what we had, keep in mind, we had a deterioration that was occurring. So we just didn’t want – if we wouldn’t have taken action it would have been affecting the margins, because that was going to heading to a loss territory.

[Kevin McVeigh:]

Got it.

[Charles Sykes:]

And that’s why it isn’t so much about the impact to me today is probably more about just it was going becoming another headwind that we’re going to have deal with. So we just got ahead of it and just sat down in a very professional way dealt with it then. So that’s why the answer to you question – because you are probably scratching your head thinking, well, why did you end up [indiscernible]. But no, it was more about where we’re headed in and it was going to become a headwind for us, so we just took control of it and responded.

[Kevin McVeigh:]

Got it. And Chuck was that one client or was that a couple of different clients?

[Charles Sykes:]

That is – it’s two but it’s primarily either the two, its 85% related to one.

[Kevin McVeigh:]

Got it. And then just in terms of the net additions versus subtractions ahead, can you just help us understand a little more? I would think particularly with the work at home, why you need to swap out those seats from just – I guess is it a different vertical? Or is it a different part of – because it sounds like if it's all in the Americas, it's not kind of the offshore versus on. Just what’s driving the decision that it's got to be a net zero, but you are shifting those seats around, if you would?

[Charles Sykes:]

I hear the question, I’m trying to – are you talking about my comment where I’m saying we’re having to remove seats? Why we are having to do that or…?

[Kevin McVeigh:]

I guess why can't you – those existing seats as opposed to incurring the expense to open up new centers and things like that, can you not leverage those as opposed to – I know you are adding some, subtracting some; it's just – is it just the existing seats you can't utilize? Or just why do you have to add versus subtract?

[Charles Sykes:]

Yes. Okay. I got it. And I see it’s a really relevant point strategically for us in going forward. So, traditionally today those of us in the business that have significant relationships with the lot of our clients and that’s a majority of us today, those clients want dedicated centers. And therein lies the problem, because we ended up having – we’ve used the terms like Swiss cheese where you have little empty pockets of facilities and things that you’re trying to put to work. And so, yes, you can go out and we do go out and we try to find customers that will use 70 empty seats in a location. But when you start measuring up your cost of sell, when trying to make all that activity happen and everything, and the efforts that goes into that versus your pipeline over here with five deals, where everybody wants to give you five dedicated centers. It just becomes noise in your financials. And we do try to shift some of the seats out that we have to go virtual, so we have a seat that we have 400 seats in. Let’s say, we have a 100 empty of them for whatever reason we can’t get the 100 put to use with the existing client or other clients. We have been successful in getting some of those existing clients that go virtual and empty out the center and then sell the empty 400 seat center to one of our existing big clients. So, we are doing that kind of stuff Mike and in fact that’s part of the reason why you’re seeing our utilization coming around. Its also one of the reasons why the one of the first questions was, why is your CapEx going up when I’m not seeing as many seats, because we do so have to make investments in the virtual IT infrastructure to enable people. So even though – that’s probably going to be a little bit anomaly. We’ll have to think about how we talk about our CapEx in the future when we’re provisioning for the virtual platform. But we are doing those things, I mean, I don’t think going forward you’re going to see a whole lot of noise anymore though about existing a bunch of centers. We’ve really got a lot of that hard work behind this. So this guidance we’re given is probably kind of the last thing you’ll hear us talk significantly about it.

[Kevin McVeigh:]

Got it. That's helpful. And then if I could, one more. On the transportation side, do you feel like we are kind of bottoming here, Chuck? And is that kind of – the softness you'd seen there is that kind of end-of-life programs? Or is that just less activity? Or how should we think about that, just into 2015, for just the transportation vertical in particular?

[John Chapman:]

There’s no loss of business. Its softness in volumes more than loss of business, and we expect it’s probably bottomed out and be pretty stable.

[Charles Sykes:]

Yes.

[Kevin McVeigh:]

Super. Thanks so much.

[Charles Sykes:]

Thank you.

[Operator:]

[Operator Instructions] Our next question will come from Shlomo Rosenbaum of Stifel. Please go ahead.

[Shlomo Rosenbaum:]

Hi. Good morning. Thank you very much for taking my questions this morning. I just want to go over kind of comments about exiting business that's lower margin business. Is it fair to think of it that in the normal course of work or in a given year, maybe it would have been a 1% drag a revenue, but this year, it's a 2% drag our revenues? Is that the way I should think of it? It's like 1% incremental? And I'm trying to figure out what you did – are you really doing – are you doing significantly more this year versus last year? It sounds like you want to get ahead of a margin thing. But it seems like – I mean, Chuck, you do this every year.

[Charles Sykes:]

In terms of what is called normal, we looked at end-of-life to be normal around the 4%. If you include the $25 million, we’re probably close to the 6% in our projection for 2015. But our actual normal level is still around that 4%.

[Shlomo Rosenbaum:]

So normal is 4% and the range this year is 4% to 6%, is that what you’re saying?

[Charles Sykes:]

Yes. For 2015.

[John Chapman:]

For 2015.

[Shlomo Rosenbaum:]

Yes. For 2015. Okay. So, if I just look at excluding kind of that part of the business and exiting that part of the business, is the growth rate – in other words, if I'm just looking at the currency impact, am I looking at kind of a 3.5% growth rate?

[John Chapman:]

If you exclude with both the currency on the sub-optimal program, our guidance implies 3.6% to 5.1% constant currency growth rate.

[Charles Sykes:]

For 2015.

[John Chapman:]

For 2015.

[Charles Sykes:]

But I think Shlomo was trying to get an idea – he is thinking about extrapolating now. To me that the normal growth rates in our business for us, we’re looking still under range, Shlomo, of 4% to 6% in the steady state fashion. Granted we were coming off a year where Europe, we were growing 22%, last year, I mean, it never happens exactly in that perfect linear line. But as you’re trying to build the model, we should be able to have to 4% to 6% net growth which will be inclusive of these types of events and things that are always occurring in the business to some degrees. We only have to call them out when it messing up the guidance that we’ve given. But when you’re trying to model and just like we look at our own expectations, 4% to 6% is inclusive of these types of things that happen. And normally if you looking at programs that for various reasons volumes reduced, clients go away for whatever reasons, lot of stuff happens, what John saying is that mode is normally around 8 [ph]. So what that going to imply is that if you had zero, zero reduction the business would grow 8% to 10% in the model.

[Shlomo Rosenbaum:]

Got you. Got you. And then is the tax rate going up because more work is being done in the US? Or are you getting an expiry on some of the special economic zones in the Philippines? What's going on over there?

[John Chapman:]

Yes. We definitely growing our revenues in the U.S and we’ve also expanded our operating margin in the U.S. and you see that coming through the tax rate. So in terms of again, modeling if you look, we’ve already guided where we are for 2015 tax rate. And if you’re looking beyond 2015, we’ve still go up 1% and 1.5% tax rate impact from tax holidays that will eventually expire, some of which will happen in 2016, some in 2017, assuming we can’t extent them. So in terms of the modeling you will look at 2015 rate on assuming no change to statutory, no change in further mix of revenues and earnings that you’d be looking another 1.5 points on top of the 2015 rate.

[Shlomo Rosenbaum:]

Okay. And then just – if I do the math correctly, did AT&T and aggregate grow like $62 million year-over-year?

[Charles Sykes:]

Yes. That’s true.

[Shlomo Rosenbaum:]

And is there – I have probably asked this question numerous times in different shapes and forms over the last few years. But if you kind of exclude AT&T, what’s the implication for what's going on with the other clients that you have? The commentary is that you are growing with all your big clients, but if I just kind of take that one number, that seems to imply a huge amount of the growth that you guys got year-over-year. And is that -- should I be looking at it excluding say the 4% to 6% that normally goes away in any given year or how should I think of that?

[Charles Sykes:]

Yes. No, it’s a fair question. I can tell you that for us internally I mean, the thing that how you think about it in this context is that the reason why its standing out so much, one is that we are enjoying a good relationship and we are having a good success with that company. But on the other hand the thing right that’s making it stand out so much is really the transition that occurred side by side with the growth with the reduction, with the financial services. And that again is purely related as I’ve answered earlier in the questions on the selling off of the legacy mortgage asset servicing piece with four of our clients and one of our clients making an acquisition. Had those events not had taken place you would still see as I have stated in the last couple of years, our growth is clearly coming from the communications and its coming from financial services. Now once that comparable clears out with the legacy asset mortgaging business being pulled off, you’ll start seeing growth again in the financial services side and that will look balance for us. So, that’s also just help out. We see that and we need to have good distributed growth which again just as why we’re excited. I’ve got Drew Blanchard on board. We need more market facing executive leadership. So we are going to have to continue to make some of the investments so we make sure that we are getting good distributed growth. But its not a kind of thing, I wouldn’t – the way the numbers are, you would make a mistake if you are just linearly extrapolate out that all the growth comes from AT&A and everything that’s happen in the last year or so is going to continue in that trajectory. It will turn. It won’t stay that way.

[John Chapman:]

Our constant currency growth rate was 7.2%, if you actually exclude AT&A its still at 3.8%, it’s still healthy and again, a little bit for the weakness in financial services. We’ve had really some real strong winds in the technology vertical, real marquee names that we expect to continue to see revenues growth on in 2015.

[Charles Sykes:]

Yes.

[Shlomo Rosenbaum:]

Okay. Great. Thank you very much for the color.

[Charles Sykes:]

Yes. Thank you.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Mr. Sykes for his closing remarks.

[Charles Sykes:]

Yes. Yes. Just as always, just very simply I will just say thank you to everybody. I appreciate the interest in the company and certainly all of the questions. And also want to thank again our employees, I think they have done a great job with our quarter, we are on a great trajectory and we got good things ahead to report. So we look forward to getting back to everybody next quarter. Everybody have a good day.

[Operator:]

Thank you. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.