Sykes Enterprises Inc Q3 2008 Earnings Call Transcript

Nov.19.08 | About: Sykes Enterprises, (SYKE)

Sykes Enterprises Inc. (NASDAQ:SYKE)

Q3 2008 Earnings Call

November 04, 2008; 10:00 am ET

Executives

Mike Kipphut - Chief Financial Officer

Subhaash Kumar - Vice President of Investor Relations

Chuck Sykes - President and Chief Executive Officer

Analyst

Josh Vogel - Sidoti & Co.

Bob Evans - Craig Hallum Capital

David Koning - Robert W. Baird

Sam Saunders - SIG

Eric Boyer - Wachovia

Howard Smith - First Analysis

Operator

Welcome to the Sykes Enterprises, Incorporated third quarter 2008 conference call. Today’s call is being recorded. Management has asked me to relay to you that certain statements made during the course of this call as they relate to the company’s future business and financial performance are forward-looking. Such statements contain information that is based on the beliefs of management, as well as the 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 call over to Mr. Chuck Sykes, President and Chief Executive Officer; please go ahead, sir.

Chuck Sykes

Good morning everyone, and thank you for joining us today to discuss Sykes Enterprise’s third quarter 2008 financial results. Joining me on the call today is Mike Kipphut, our Chief Financial Officer and Subhaash Kumar, our Vice President of Investor Relations.

Keeping with the format of previous earnings calls, I will briefly touch on the highlights of the quarter. Mike will then discuss the financials for the quarter in more detail, after which I’ll wrap up the call with my closing remarks and then open the call up to Q-&-A.

Let me begin by saying that I am very pleased with our third-quarter financial results, particularly in light of the financial environment we are all dealing with these days. Clearly, our employees worldwide deserve praise for their solid execution across all functional areas of our business. Their dedication and their hard work have been vital to the continued success of our business.

Here are some of the key highlights of the quarter. Third-quarter consolidated revenues increased 17.6% on a comparable basis to $207.1 million. Our growth was driven by the Americas and EMEA regions, both up 14.9% and 23.3%, respectively. Seventy percent of our comparable revenue growth came from existing clients, which remain broad-based as our top 40 clients who represent over 80% of our total revenues were up 28%.

This broad-based growth highlights our strong operational performance and the overall health of our client relationships. In addition to our strong revenue growth, we achieved operating margins of 9.3%, which is our highest quarterly operating margin in eight years, highlighting the strength in our operational platform and the financial leverage in our business model.

Also contributing to our operating margin performance, is the fact that we increased our capacity utilization to 80% from 77% in the same period last year, even as we increased our seat count by 2,600 on a comparable basis and finally we maintained our industry-leading low client concentration profile with our top 10 clients at 41% of consolidated revenues, up slightly from 39% on a comparable basis.

With that, I’d like to hand the call over to Michael, Mike.

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 third quarter, after which I’ll turn to the business outlook for the fourth quarter and full year of 2008.

For the third quarter of 2008 consolidated revenues increased 17.6% to $207.1 million over the comparable quarter last year. That growth was spread across various verticals, most notably transportation which was up 40%, financial services up 31%, technology up 25%, and communications up 8%.

Our third quarter earnings per diluted share were at $0.47 versus $0.30 on a comparable basis, and versus $0.28, the mid-point of the diluted earnings per share range we provided in our third quarter outlook.

The $0.19 earnings per diluted share out performance versus the midpoint range breaks down as follows. Approximately $0.12 to $0.13 per diluted share is due to a combination of higher than anticipated revenue growth and better leverage of G&A expenses, as well as the shift in timing of certain expenses.

Approximately $0.05 to $0.06 of the $0.19 per diluted share is due to an increase in unrealized foreign currency transaction gains primarily from U.S. dollar denominated assets and liabilities held in international operations and slightly higher interest income from higher levels of cash investments.

I recall in our last earnings conference call that I mentioned that our forecast included only an estimated $1.1 million in interest income and nothing for FX and other income due to the extreme movements in currency markets.

This entire variance is due principally to those FX movements and the balance, approximately pennies, from lower than anticipated estimate tax rate due to a mix of earnings within various tax jurisdictions.

During the quarter the approximate net operating profit impact of foreign currencies including hedges was an unfavorable $700,000 to operating income. Given the continued strength in the U.S. dollar relative to the Philippine peso during the third quarter of 2008, the Philippine peso hedge was an unfavorable $1.6 million.

By contrast, the hedge gains in the first quarter and second quarter of 2008 were $2.6 million and $400,000 respectively, when the dollar was still weak relative to the Philippine peso. However, the third quarter strength in the U.S. dollar relative to the Philippines peso in the second quarter did favorably impact our Philippine peso denominated expenses.

For the remainder of 2008, we are approximately 81% hedged based on our latest forecast at an average rate of approximately PHP 43.24 to the U.S. dollar. Likewise, for 2009, we are approximately 66% hedged at an average rate of PHP 43.43 to the U.S. dollar. We are evaluating our hedging strategy in light of recent currency trends.

Now let me turn to this select balance sheet and cash flow items. Our cash and cash equivalents at quarter end, September 30th totaled $220.1 million, with $202.7 million or 92% held in international operations and would be subject to additional taxes if repatriated back to the U.S.

Cash flow from operating activities totaled $26.7 million, more than doubling from $12.6 million in the comparable period last year. The increase in cash flow from operating activities was due largely to increases in net income and non-cash reconciliation items such as depreciation. Similarly, free cash flow from operations increased to $17.3 million from $4 million in the same period last year.

At quarter end we had no outstanding debt. Receivables were at $157.6 million. Trade DSOs for the third quarter were at 69 days, flat sequentially and up three days comparably. The DSOs split between 61 days for the Americas and 86 days for EMEA.

We spent $9.5 million in capital expenditures. Depreciation and amortization totaled $6.9 million for the third quarter and trailing 12 month return on invested capital was approximately 36%.

Now let’s review some seat count and capacity utilization metrics. We ended the quarter with approximately 28,600 seats, split between 22,950 in the Americas region and 5,650 in the EMEA region. The total seat count was up by almost 2,600 from the third quarter of 2007 and up approximately 1,200 sequentially. The sequential increase in seats occurred across the U.S. and Latin America, including Costa Rica and El Salvador.

Offshore seat count at the end of the third quarter was approximately 18,200 or 64%, of our total seats versus approximately 17,000 in the same period last year. Capacity utilization rates at the end of the third quarter of 2008 were 79% for the Americas region and 82% for the EMEA region. On a consolidated basis the capacity utilization rate was 80%.

Capacity utilization rates in the same period last year was 76% for the Americas region and 78% for the EMEA region. On a consolidated basis the capacity utilization rate in the prior year period was 77%.

Now let me turn to our business outlook. The company continues to convert its sales pipeline into new program wins within the communications, financial services and technology verticals. To accommodate some of the new wins, the company plans to add approximately 700 seats in the fourth quarter.

The fourth quarter 2008 revenue and earnings per share outlook, however is impacted by the following factors. First; the volatility in the foreign currency markets, with the rapid and continued depreciation in the U.S. dollar against the euro, the company’s fourth quarter revenue assumptions now reflect the euro trading in the narrow band of $129 to $132 to the euro exchange rate, down approximately 16% from the previous forecast of 155 to 1.

Therefore, the revenue impact from strengthening U.S. dollar is expected to be between $12 million and $13 million, with estimated unfavorable earnings per share impact of $0.02 to $0.03 per diluted share.

Second; expenses related to new seat editions and the ramp-up of seats added in the third and fourth quarters of 2008 are expected to impact operating income. Considering these factors the company anticipates the following financial results for the three months ended December 31, 2008.

Revenues are in the range of $195 million to $200 million and net interest income of approximately $1.1 million and consistent with last quarter, we are not providing guidance on FX gain or losses in other income due to the volatility of the currencies. Tax rate is approximately 17% to 18%, earnings per share in the range of $0.30 to $0.32 per diluted share, and capital expenditures in the range of $7 million to $9 million.

For the 12 months ended December 31, 2008 the company anticipates the following financial results. Revenues in the range of $813 million to $818 million, tax rate of approximately 17% to 18%, earnings per share in the range of $1.59 to $1.61 per diluted share and capital expenditures in the range of $33 million to $35 million.

With that, I’ll hand the call back over to Chuck for a few closing remarks.

Chuck Sykes

In closing, I just like to reiterate that we remain cautiously optimistic about our growth prospects and granted it’s difficult in today’s environment to not be a little apprehensive about the future, but I believe our opportunities outweigh our risk.

For instance, we continued to experience a healthy sales pipeline, driven by the fact that companies are using the benefits of outsourcing to reduce current costs as well as future costs by converting their fixed operating expenses into variable expenses.

The majority of our new opportunities are coming from the wireless and banking segments, which provide significant growth potential throughout the global market. In addition to our sales opportunities, we are very fortunate to have relationships with some of the strongest brands in their respected industries.

The strength in their business, coupled with the strength in our relationships, which is derived from our strong operational performance, provides a more stable environment for our company and finally, if we do encounter future challenges with our business, we are also very fortunate to have a healthy risk profile driven by low client revenue concentration, geographic and vertical diversification and a strong balance sheet.

The fact that we have no debt and a strong cash position gives us tremendous flexibility. We can easily fund our internal growth as needed, and we can remain opportunistic with strategic investments that may come our way.

With that, I’d like to open up the call for questions. Operator.

Questions-and-Answers Session

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

Josh Vogel - Sidoti & Co.

A couple of questions for you here, the first one is if we don’t see any more deterioration in the global markets, do you think you can get margins to double-digits in this environment?

Chuck Sykes

I do believe that we can continue to see improvements in our margins and this is something that -- you guys have followed us now for a while and as we continue to increase our revenue base we’ve been able to continue to get the economy at scale, our G&A and we don’t see anything out there in the environment right now that would knock us off that path.

Obviously, being at Q3 now we are going to avoid as much as we can giving you guys specifics into ‘09 or anything, but just answering your question in a general outlook, yes I mean we do believe we can continue on the path to move our operating margins into a higher band and so we’ve gone from four to six back in the ‘05 timeframe. We jumped in, then to the 6% to 8% and now I think in this range of revenue that we are, we are now moving into that range where we could be in that 7% to 9% and continue to get up into the 10% margins.

I do believe this business, if you get up into the range of around $1.3 billion to $1.4 billion, I would be disappointed if our company couldn’t get into that double-digit operating margin range, but that’s just to give you an outlook about how we see our business. There is nothing to me that’s knocking us off that path.

Josh Vogel - Sidoti & Co.

Now shifting gears a little bit, we’ve been seeing a lot of your competitors in the midst of volume migrations to various regions around the world. I was wondering if you were currently involved in any migrations, yourself.

Chuck Sykes

Nothing significant, I think the nature of the business now, just being global in nature is that every company in this space is probably going to be always encountering some degree of movement, but I think the question always get down to say just what percent of your business.

That is one of the things that is good with Sykes right now, is that we’ve got our transition behind us and so we are really able to just focus on continuing growth and optimizing our business. So if a company today is a little late into moving offshore that could be unique to them, but we went through that in the ‘02, ‘03, ‘04 timeframe and pretty much it’s behind us now.

Josh Vogel - Sidoti & Co.

A couple quick ones, if I can. The seats that you build out last quarter and the 700 you have for Q4. When do you expect them to be fully up and running and contributing to results?

Mike Kipphut

Let me comment on that, a lot of those seats came on board in very late in the third quarter. So throughout the fourth quarter you’ll see the impact of ramps associated with this. Historically, we’d like to obviously shoot for 80% to 85% utilization rate and with the new facility, sometimes it takes some time to get up to that level, but over the next 60 to 90 days you’ll see quite a bit of our ramp occurring and so as we go into fourth quarter and somewhat as we go into the first quarter of 2009 you will see the impact of that with full utilization probably, nine months to a year down the road.

Josh Vogel - Sidoti & Co.

Just lastly, anything with your accounts receivable trends, are you seeing any delays from clients in payments?

Mike Kipphut

Nothing significant at all, usually at quarter end sometimes there’s a lot of wind addressing going on, where delays in month end payments occur at quarter end of course, you collect the next five or six days after quarter end, but other than that we’ve got a great client base, very solid. We spend a lot of time up-front with the clients to make sure that we’ve addressed all the potential exposures based on facts and circumstances and we deal with those on a quarterly basis, so we are in very good shape and no major concerns.

Operator

Your next question comes from Bob Evans – Craig Hallum Capital

Bob Evans – Craig Hallum Capital

First, I just wanted to make sure I’m clear on the margins. You had sequentially a strong margin improvement. Is there anything one-time in nature there or how should we view gross margins going forward?

Mike Kipphut

There is nothing specific on margins other than sometimes volumes, certain clients do jump more than what we originally anticipated and as a result of that through our operations people we do an excellent job, we are able to take advantage of some efficiencies and to some extent that’s what occurred in the third quarter, but also as a I mentioned in the question previously, that some of the training and ramp costs that we anticipated in the third quarter is actually floating over to the fourth quarter.

So that obviously will have an impact on margins and if you look at our guidance, we have guided down in the fourth quarter on operating margins for those simple facts.

Bob Evans – Craig Hallum Capital

Chuck just wanted to make sure I heard something right on a previous answer. I believe you had said in the past, as you approach $1 dollars a 10% operating margin is more achievable. Is that still the case?

Chuck Sykes

For me the number has always been, I hope it has been for me -- 1.3 is the number in the revenue, but Bob the one thing that just, not saying you didn’t hear me say a 1 billion.

The reason where that could have come into play is, if we today had all of our clients performing to the level that it’s designed to be and we have 200 clients, so it’s not a perfect world for us. We today would be at 10% margins at our current revenue level, but that is not to me real world and what I am doing is that when I am just giving you kind of linear extrapolation, we can continue to manage our cost, we hold on to our clients and if we can sustain the gross profit margins just once you get to around that $1.3 billion we ought to be really approximating that 10%, but along the way if we can find a way to address those client issues that aren’t performing to the levels they need to be, it could jump up and we pretty darn close to it this quarter in the way it looks.

Bob Evans – Craig Hallum Capital

I guess my point is, it seems like that level of revenue growth, I guess maybe my understanding it was more or less closer to the $1 billion mark, you’re already at 800 and change and 9%-plus operating margins and I know it can bounce around a little bit. It would seem to me that once you get $1 billion or little bit more you would have scale, benefits on the G&A or that would get you closer to that 10% level.

Chuck Sykes

You should sit inside some of my internal meetings and address that same point. It is there, it is capable and I don’t want to discount that from you, but I just want to keep healthy, realistic expectations. I would just go back and comment on what you were talking about earlier with the gross profit margins.

When we talk about our company having 15% growth, you have to always peel back the onion and say where’s it coming from, and this time we said 70% is from our existing clients and when it comes from existing clients it literally could mean business that we had to add new hires and for new training, but sometimes we will just get a spike in call volume that hits our existing base of agents that causes our utilization to just jump up.

We did experience in Q3, keep in mind with some of the financial clients and things that we serve, all of the concerns. There is a lot of people calling about portfolios, people were calling about their credit cards, they are concerned about interest rates, they have received letters in the mail getting these new approaches that the financial companies are going to taking with them and that caused a big spike in call volume rather unexpectedly.

We gave you bogey marks to say for every 10 points in facility utilization; it could give us almost 2.5 to 3 points NOI. On gross profit margin, if we could get one percentage point of utilization improvement it gives us almost 80 basis points to our gross profit margin.

So, if we have agents that are sitting there and not making up these numbers, but if we had agents sitting there that were 70% utilized and suddenly went to 72%, you would see across the company, you’d see our gross profit margins go up 1.6%. So it would go from 35.5 to 37.1, and so there is some of that that is occurring in Q3 as well and that’s very difficult to project and these spikes can just occur. So we don’t really bake that into our forecast when we are going forward.

I just wanted to give you guys a little bit more color in how those things can work and that is why you can see suddenly a spike like that hitting.

Bob Evans – Craig Hallum Capital

Could you also comment on the competitive environment? Given the recent market, have you seen any changes in terms of some of the clients buying patterns, is there any flight to quality, if you will as it relates to balance sheet or give us some color there?

Chuck Sykes

I think the competitive landscape we have; I mean we certainly keep our eyes open. We respect all the competitors that we have out there and we can never relax on that, but we are seeing more and more companies today. They are starting to look at balance sheets and they do enter that into it -- we have a few that have really gotten sophisticated on it and are doing a more thorough analysis in their credit scores.

I can’t say that, that’s broad based across all of the clients, but it is probably Bob, qualitatively entering our minds but that’s just my opinion in what we are seeing, but I will tell you that when our sales guys are talking to their clients, the balance sheet and the strength of the company does come up in conversation more than it used to.

Bob Evans – Craig Hallum Capital

Not trying to be a broken record, but your financial performance has been as good as it has been ever and your valuation is at one of its best levels. Any thought on buyback here, I know a lot of cash is offshore, but you have still got some US cash.

Chuck Sykes

It’s interesting, it kind of goes to my point on the last paragraph there, when I was closing up my call and that’s just; we love the flexibility that we have and all I can tell you is that we are certainly going to be very opportunistic with all the opportunities that are coming our way, and that could be more than just doing stock buybacks.

There are lots of opportunities out there floating around, it’s getting pretty interesting and we are just very fortunate, Bob that we’re in the spot that we can be selective.

Operator

Your next question comes from David Koning - Robert W. Baird

David Koning - Robert W. Baird

First of all if we look at the Q4, it looks like you are guiding to roughly flat year-over-year and if we just use a constant currency rate, it’s about 3% to 4% growth. Maybe you can comment a little bit on your hedge losses that are going to run through that quarter to give a more normalized growth including that, and then maybe comment on why over the last eight or nine quarters you’ve been growing 15% to 20% and why it would be decelerate this much in Q4?

Mike Kipphut

Let’s talk about hedges first of all. As I mentioned in our opening remarks that for the fourth quarter we are -- I think it was about 81% hedged at 43.3 or something thereabouts. So it’s 81% hedged at 41. So in any case as the dollar has strengthened and the Philippines peso has weakened, it certainly has played havoc on that hedge.

We anticipate a pretty big loss, if in fact the currency continues on the same path it has been over the first month in the quarter. So, it could be about a $3 million loss in currency hedge in and of itself. However, offsetting that is a more favorable impact on your direct, indirect and G&A costs.

So net-wise we may be at the same level or maybe even a little bit better, since we are only hedging 81% of that level then the remaining 19% is at the higher level. So overall there is an impact there on currencies, particularly on Philippines peso for a hedge.

Overall though, we do anticipate about a $0.02 to $0.03 send earnings per share impact on hedge, not necessarily just hedging, but on currency throughout the world and that includes the euro, Costa Rican colon, Canadian dollar and just all of our currencies throughout the world. I’m trying to remember the rest of the question.

David Koning - Robert W. Baird

The main part of the question is, why would revenue growth decelerate so much in Q4?

Chuck Sykes

I’m not sure I seeing it decelerate significantly, if you adjust out with the currency and what are you looking at, David, What are the numbers that you are seeing, because you were trying to make a apples-to-apples comparison, right?

David Koning - Robert W. Baird

When we look back for several quarters, it looks like when we adjust out the euro benefit that you have for a long time, we’ve gone to organic constant current growth 15% to 20% for quite some time. It looks like this quarter, even adjusting out all those things you mentioned, it might be 5% or 6% kind of constant currency growth this quarter.

Chuck Sykes

On a quarter-over-quarter basis, that is what you are coming to?

David Koning - Robert W. Baird

Yes, on a year-over-year basis.

Mike Kipphut

And you’re including in that some of the hedge gains as well.

David Koning - Robert W. Baird

Right.

Mike Kipphut

So if you discount those two that will take that out and we mentioned what some of those gains have been in the prior quarters. If you look at the prior year, in the third quarter we had $1.3 million gain in hedging, $600,000 in Q4 for a total of $1.8 million. I’m sorry, that’s just a piece of it. Let me give you the full amount. It’s $1.7 million in the third quarter, $3.4 million in the fourth quarter last year and $5 million in total last year.

So once you factor those out as well, you’re probably getting more along the lines of anywhere from 5% to 10% growth rate in revenues. Fourth quarter is down a little bit because of the bigger impact on currencies. We are up 60% on the euro and $12 million to $13 million. So if you take back to that end, we still have about a $5 million growth.

We are taking into consideration that some of the ramps that we have may take place more towards the end of the quarter versus the first part of the quarter, because you have to get all of the training done before you actually start getting the good revenue from those comparisons. I hear what you are saying. Overall for the fourth quarter it may be down slightly, but not that significant.

David Koning - Robert W. Baird

Okay, that’s very helpful and just one more question and sorry for some of the complexity here, but next year when we put into our model what the current euro is it looks like a headwind to revenues of about $35 million and a little bit to EPS, but not overly dramatic, but the Philippine peso, I know you’re 66% hedged or whatever, but some of it’s still floating out there.

The peso benefit is probably a 100 basis point in the margin alone, so that should more than offset the euro headwind based on the way the currencies are playing out today. Is that a reasonably fair way to kind of look at all the currency movements, but net it looks like somewhat of a benefit if everything kind of hangs in here through ‘09?

Mike Kipphut

That is reasonable. It’s just the magnitude of the US dollar strength versus any particular currency. They all don’t move in the same direction and I just would caution you on the level of some of the movements on some of the currencies.

Just be careful when you extrapolate from quarter to quarter, because even if you look at the euro, if you look at the first quarter this year it was at 150; second quarter it went to 156, back down to 150 and now we are in the 120 range. It’s the volatility in those currencies that really can impact you. However, even given that there is nothing wrong with your logic on the impact into 2009 as far as the benefit that we could get from a stronger US dollar particularly within the Philippines and Costa Rica.

Keep in mind though, as you pointed out, there is a hedge and we are basically 66% hedged. So you still have the remainder of that that is floating.

Operator

Your next question comes from Sam Saunders - SIG.

Sam Saunders - SIG

I wanted to get some more clarity on the European business. I had been under the impression that Q3 was a seasonally weak period, so if you could provide some color on the apparent strength there, that would be helpful.

Mike Kipphut

Certainly. As we mentioned earlier, some spikes in certain client volumes certainly helped out the quarter. It was a situation where communications as well as the technology client had significantly more volume than we originally anticipated in the forecast in the quarter. We were able to take advantage of that by getting higher margins because of the efficiencies of that higher volume and the existing locations with the same level of agents. So that contributed pretty significantly to that.

Sam Saunders - SIG

And then in the Americas region, it looks like you continue to add seats to the domestic operations; could you update us on the demand characteristics that are driving this trend?

Mike Kipphut

Yes, there are two factors driving capacity expansion in the Americas. One is the US itself. We spoke in the past of communication clients and financial services clients growing solely in the US. They have no interest in taking some of those operations offshore. So that is certainly driving a lot of the growth and it’s not only a couple clients, it’s throughout several clients in those verticals.

Also we are seeing some nice opportunities in Latin and South America and we are taking advantage of that. These are operations that are mature in Costa Rica and El Salvador, who have a great deal of experience and have the opportunity to increase our margins in those areas by expanding additional seats. So as a result of that we did add some seats in El Salvador. In San Salvador, El Salvador, we added approximately 250 seats there.

We also added about 500 seats in Costa Rica on the other part of San Jose. So we really split up the area into two locations where we can draw agents from different locations, but take advantage of the leverage of our senior management team that we had at those locations.

So those are great opportunities for us and that’s the reason why we’ve expanded in those areas, but we also see that continuing into the fourth quarter this year in those same exact areas, both the US as well as South and Latin America.

Sam Saunders - SIG

Do you have the utilization rate for US?

Mike Kipphut

Yes, overall for the US utilization is, including the capacity additions of about pretty close to 500 seats, we are at 64% utilization. That’s down from the second quarter, 75% utilization, but again as I mentioned earlier that capacity came on at the very last part of the quarter. It will take 60 to 90 days to get those utilization rates up as we put new clients and get through the training and ramp costs.

Sam Saunders - SIG

As we look at the 700 seats that are anticipated in Q4, is there any difference in the geographic trend there?

Mike Kipphut

No, none whatsoever.

Sam Saunders - SIG

Finally, are there any upcoming contract renewals that we should be aware of as we head into ‘09?

Mike Kipphut

I guess the best way to answer that overall is that if I look at our top 50 clients, we have approximately seven or eight; I’m trying to remember off the top of my head, that come up for renewal in the fourth quarter. Typically, we generally run anywhere from 10% to 20%, usually 10% to 15%, client renewals coming up on every quarter basis. I do not anticipate any significant changes in those whatsoever, but we do have those seven or eight coming up for renewal in the fourth quarter of 2008.

Operator

Your next question comes from Eric Boyer - Wachovia.

Eric Boyer - Wachovia

If you stripped out the timing impact of the new seat expenses that are being pushed out into Q4, what would a normalized Q3 operating margin look like; is that more around the 8% mark?

Mike Kipphut

Yes, we’ve not done that, but that seems pretty reasonable.

Eric Boyer - Wachovia

Then also could you just talk about the visibility for existing client revenue and then new customers, has that changed at all; are deals being pushed out; just the pace of business entering your pipeline as well.

Chuck Sykes

Yes Eric, this is Chuck. I would say right now in terms of the pipeline it’s good. We are not seeing any significant delays for things and I would say the nature of the environment right now is actually accelerating companies to make what some people can have as some difficult decisions in outsourcing because it involves people, but right now though we are seeing that as a favorable tailwind for us.

The one area that does make it a little complicated for us and I’m not going to have real specifics on you, but just to give you a little bit of color with it; companies in our space that are service related, we feel more stable in the outlook of that because the call volume which is the driver for our business, is not as dependent on new sales growth. Whereas companies that are selling products, particularly products today that require financing or products companies that have already outsourced the majority of their business and in fact may be outsourcing the majority of the sites, in that case our business is going to pretty much mirror what happens to them.

What I’m telling you is I mean that would apply to anybody in the business, which is why I think that the client concentration risk profile becomes so key. Even though we certainly will have some of these very specific acute issues, it isn’t going to be quite as material as it could be for others, but the product side and everything that’s the only place where I can’t say we have really good visibility.

I don’t want to paint a negative picture, because we are not sitting here today with absolute known news, but just intuitively, common sense-wise, as I’m trying to reflect out what are the areas in our business that could be challenges. Its product companies, particularly ones that require financing. They have outsourced already a lot, so they can’t give you additional business if their volume goes down.

Then the other is just the currency fluctuation. Just like the question earlier that a couple of questions ago, it just makes it difficult for us to get really good, clear visibility when you are trying to do all of your analysis, when the currencies are jumping like they are from quarter-to-quarter.

Eric Boyer - Wachovia

Did you see any change in decision-making from clients from the beginning of the quarter towards the end and was there an accelerated pace of pickup in decision making?

Chuck Sykes

Not necessarily in the decision making, but I would say in the interest level. As we are out knocking on doors, keep in mind for our company right now, technology has always been kind of a staple in our business and we think that it’s still going to present opportunities, but we still believe that a majority of the growth in the next two years is going to come from the communications and the financial services side.

The financial services sector has not typically outsourced that much business, but in today’s environment we are seeing a much greater receptivity to meeting with us, the inquiries that we are receiving, things such as that; but companies that are already in the pipeline, that we are already engaged with, we are nothing a delay in that decision making. I kind of put them in two camps.

Eric Boyer - Wachovia

Finally, just a quick question on voluntary attrition. I would expect at least in the US with the slowing economy that could actually benefit you there; are there any implications that could have on the margins going forward?

Chuck Sykes

On the attrition levels?

Eric Boyer - Wachovia

Yes.

Chuck Sykes

It could; certainly it can end up doing that, but I don’t know, there are other factors out there right now depending on what is happening today with the elections and everything that I think negates some of those benefits.

Keep in mind though; overall that attrition in the US compared to most all our other sites is quite a bit higher. It’s usually very common to be a size 100% plus attrition on an annual basis. So that’s not changed much over time; perhaps it will slow down a little bit and that is okay if it does do so. That will help our margins as a result of that, but to get significant impact it has to come down pretty substantially.

Operator

Your next question comes from Howard Smith - First Analysis.

Howard Smith - First Analysis

My question has to do with how you are working with your customers to forecast the demand? It looks like you got hit by some spikes with a couple of customers that was unexpected as well as these delays in the capacity that you brought online.

Is that purely randomness with the normal filter that you’ve had over the last couple of years on your customer expectations or have you taken a more cautious approach to what your customers are telling you and staffing for the lower end of the ranges and trying to intentionally push some capacity out such that when you get the normal volumes you see the operating margin improvement?

Chuck Sykes

I would say, Howard, just typically for us -- I know a lot of people characterize this and I guess it’s probably true in the conservative approach with it; we don’t purposefully try to take always the lowest conservative. We try to make the most informed decision. I will tell you that we certainly do not take the most optimistic, that’s for sure.

The forecast demand, the way we do it is just the old fashioned way. We’re just having frequent conversations with our clients; sometimes our forecasts are only as good as their own internal. We have as a company learnt those clients that are pretty good at forecasting their business and those that aren’t and we will typically trust our forecast more so than theirs.

Regarding the Q3 change that spike in volume, even though I don’t have the absolute hard numbers here to tell you what percentage of the business and things that it was, but I know the clients where we got just unforeseen spike in call volume, much of which was just wasn’t forecasts or anything. It was just purely driven out of the concern environment and this was particularly on the financial services side with companies.

That is something right now that we are not forecasting again, because again it’s difficult to do, but that is an area where it just becomes difficult to forecast that kind of behavior, that’s more of an emotional side with the clients, but beyond those events we can sit down, they have the number of clients they are signing up.

They know if they are looking to outsource more business to us. They can share with us if they are getting ready to make a policy change that is going to cause a lot of customers to call or if they are going to be implementing new technology that is going to cause an increase in handle times. These are typical conversations that we are always having all the time.

Howard Smith - First Analysis

There is a capacity that got brought on a little later than initially expected; was that due to just the usual customer delays in bringing on programs or was that a conscious effort on your part?

Chuck Sykes

Well, there’s two aspects for that I think, when we are talking about capacity. One is just having our building ready to go in which we are incurring the expense and then the other is just when the clients start ramping and we as a company certainly want to make that as much just-in-time as we can, but it’s a little difficult to do.

Right now what you’ve seen is we actually have been adding seats in the United States and most of those seat today that we have got we are leasing those facilities with it. The delays that we had coming in more is on actually getting the people in now and that hasn’t really been so much a delay.

Sometimes it is in negotiating the contract; sometimes we’ll run into a delay in the technology with getting circuits turned up, things such as that. Sometimes the landlord will delay us in doing the leasehold improvements. So isn’t always indicative that clients are hesitating in their decision, it’s just the natural project management challenges that we can sometimes encounter.

Mike Kipphut

And those things are really exponential when you start going offshore, too. Again, different cultures operate a little bit differently and what you anticipate may happen, may not happen and sometimes it gets a little more difficult.

In addition to that just keep in mind overall that in the third quarter with our higher margins, we had anticipated a little more ramp in training costs than we actually did get in the third quarter, which again we’re telling you now, we think will enter the fourth quarter and somewhat in the first quarter of next year. So that was a factor as well and the margin improvement that we had in the third quarter versus the second.

Operator

Your final question comes from David Koning - Robert W. Baird.

David Koning - Robert W. Baird

Just one other thing; as we looked at the tax rate, it’s been 15% to 18% over the last several quarters now. Is there anything that changes the business much over the next few quarters that would make it not wise the model, something like that for ‘09?

Mike Kipphut

Yes in ‘09 again we are not going to provide guidance at this point in time, but I think we mentioned previously on other calls too that this year is a little unusual; it is a little bit lower than we than would be normal. So as you look into 2009 and beyond, it would be at least at the say 20% to 25% range in there and again I will provide a little more color and guidance on that as we release fourth quarter 2008.

David Koning - Robert W. Baird

If we do look at tax rate as being a little bit of the headwind, the interest other line, it seems like it will probably come down in ‘09 after you’ve got some of those gains in Q1 and Q2 and Q3 of this year. It seems like there’s a lot of importance on the margin getting better again in ‘09 to keep EPS at least flat. Is that a way to at least just put the pieces together, to think about it without really giving any overall guidance?

Mike Kipphut

Sure, that’s a good way to look at it. You brought up an important point that I think bears at little more comment. In other income we have been very fortunate to get some FX unrealized gains by holding US cash in other operations and receivables.

Just to keep that in mind, in the third quarter we had $3 million as a result of that alone. In the second quarter of ‘08 we had $3.8 million. I do not anticipate those in future years and that is the reason we don’t provide a forecast whatsoever. So just be very careful with those numbers.

David Koning - Robert W. Baird

Then on the revenue side too you have to be a little careful given the euro headwind into next year.

Mike Kipphut

Absolutely.

Operator

There are no more questions at this time. I would like to turn the conference back over to Mr. Chuck Sykes for any additional or closing comments.

Chuck Sykes

Thanks Stacy and we just want to thank everybody again for your participation. Lots of good questions and again I know despite those challenges that we have in the environment, again we feel very good with the prospects here for the company and we look forward to updating you next quarter. Thanks.

Operator

This concludes today’s conference. We thank you for your participation. Have a nice day.

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