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Executives

Charles E. Sykes - President and Chief Executive Officer

W. Michael Kipphut - Group Executive, Senior Vice President and Chief Financial Officer

Analysts

Josh Vogel - Sidoti & Company, LLC

David J. Koning, CFA - Robert W. Baird & Co. Incorporated

Matthew J. McCormack - Brigantine Advisors

Robert J. Evans, CFA - Craig-Hallum Capital Group

Kevin McVeigh - Credit-Suisse

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Sykes Enterprises Inc. (SYKE) Q1 2009 Earnings Call May 5, 2009 10:00 AM ET

Operator

Welcome to Sykes Enterprises, Incorporated First Quarter 2009 Conference Call. Management has asked me to relay to you that certain statements made during the course of this call as they relate to the company's future business and financial performance are forward-looking. Such statements contain information that is based on the beliefs of management, as well as assumptions made by and information currently available to management.

Phrases such as our goal, we anticipate, we expect and similar expressions as they relate to the company are intended to identify forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and the company's Form 10-K and other filings with the SEC from time-to-time. Just as a reminder, this call is being recorded.

I would now like to turn the call over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead, sir.

Charles E. Sykes

Thank you, Jenny. Good morning, everyone and thank you for joining us today to discuss Sykes Enterprises' first quarter 2009 financial results.

Joining me on the call today is Mike Kipphut, our Chief Financial Officer; and Subhaash Kumar, our Vice President of Investor Relations.

In keeping with the format of previous earnings calls, I'll make some opening remarks and briefly talk about the industry. Mike Kipphut 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 for Q&A.

Let me start by saying, how proud I am of our strong financial performance during the first quarter of 2009, to deliver 11.9% in constant currency revenue growth, 8.6% operating margins, earnings out performance and strong cash flow from operations that increased eight-fold highlights our steady execution against the challenging macroeconomic backdrop.

More importantly, it points our underlying discipline, the core underpinnings of which our focus, continued investment, risk mitigation and the financial strength.

Let me take a moment to touch on each one. First, by focusing on our core customer contact management business, we've been able to concentrate on delivering operational excellence to our clients, thereby enhancing client loyalty and strengthening our competitive position. This is evidenced by the strong constant currency growth rate, driven by new program wins with existing clients, expansion of existing programs and new client wins.

Moreover, that discipline around focus has afforded us the flexibility to better respond to the rapid shifts within the industry, with an eye toward driving greater operational efficiencies and maximizing profitability.

Second, by investing in our business, we have created a platform for future growth. Through targeted investments, our 20 country strong delivery footprint conserve almost 80% of the $37 billion large global contact management market. Because our business model is global in scale, we have created a differentiated value proposition which has expanded our client base. That client breadth has enabled us to broaden our growth drivers and enhance our growth profile.

Third, we remained resilient about managing our risk profile. We managed primary risk by doing significant due diligence on new and existing clients in order to proactively manage our risk profile, while secondary risk management is about keeping client and vertical client concentration in check. Although, our largest client is now 10.7% of revenues, due in part to the revenue denominator impacted by the currency headwinds, client concentration dropped sharply when one looks at our second largest client, which is only 5% of revenues.

Moreover, that large is one of the strongest players in the wireless communication space and represents multiple distinct contracts, rather caused multiple lines of business.

And finally, we have sustained our financial strength that's highlighted by our strong balance sheet. Given the uncertainty triggered by the economic turmoil, our financial strength is proven to be a significant differentiator that clients assess the buyability of their sourcing strategy by increasingly evaluating the health of their vendors.

Now, let me briefly turn to what is happening in the customer contact management industry with respect demand, pricing and wage inflation. Keep in mind though, our views are reflection of our business model and market position and this is key, given the breadth of clients we serve and that clients deal with each vendor differently, based on the proceed benefits and capability.

Let's start with demand first. Overall, it has held up well. The level of bid activity of new business, close rates and follow-thorough ramps have been progressing largely inline with our expectations. That is particularly the case within the Americas region. On top of that, we are winning new programs with existing clients and expanding the existing programs. Our strong competitive position, an average deal size of 200 to 400 seats no doubt has helped.

As for the source of that demand, within the communications and financial services verticals, it is coming from a combination of our clients' in-house centers, vender consolidation, migration from India and some growth. By contract, demand levels within the EMEA region are falling somewhat short of our expectations. We've started to see slight volume declines with some embedded clients, particularly within the technology vertical. This will likely offset some of the demand by existing clients and new program ramps within the Americas.

Also we've seen delays in closing of new business, particularly within the financial services vertical in the United Kingdom. And some of our target clients have been de facto nationalized and decision making has been put on hold.

I wanted to be clear about the volume declines in the lack of any meaningful new wins in EMEA are not related to performance or client relationship issues. But rather due to economic weakness having an impact on our clients' business and changed circumstances within specific markets.

Moving on to pricing, it has remained largely stable, both on new business and renewals. Depending on the circumstances, whether stock change or sale pricing on an old contract, we are still able to successfully push through price increases. Again, this is partly a function of our operational excellence, competitive position, as well as a relatively healthy demand environment and a favorable capacity picture.

Although, there have been isolated cases of pricing pressure, particularly with some technology, retail and financial services clients, we are seeing nothing close to what we saw during the last downturn when we had a heavy technology/product bid to our business model

Nor for that matter are we seeing aggressive pricing tactics from competitors. Moreover, what little pricing pressure is occurring is being offset largely by increased volumes. So the net is still neutral for margins.

With clients focused on cost reduction, quality and vendor stability, coupled with the fact that the industry peers have been rationalizing excess capacity, pricing dynamics thus far see more rational.

And finally, in terms of wage rates and attrition, the picture is slightly mixed. This is not all together surprising since wages are typically sticky in the short run, with demand relatively healthy as clients continue to outsource wage rates are not expected to change in a significant manner in the near term.

Moreover, what savings we do derive from lower wages are likely to be shared with our clients to some extent. As for attrition, it is already starting to trend down, trailing 12 months attrition on a worldwide basis is currently tracking around 41%. And we believe opportunities exist for us to bring that down a few hundred basis points. By bringing the attrition down, we should be able to drive greater operational efficiencies and improve performance.

And secondarily, what attrition we do incur should help us further reset wage rates somewhat benefiting our direct and indirect costs. All things being equal, the benefit derive from adjusting wage rates and reducing agent attrition should help provide some support through margins going forward.

And with that I would like to hand the call over to Mike Kipphut. Mike?

W. Michael Kipphut

Thank you, Chuck and good morning everyone. On today's call I'll focus my remarks on key P&L, cash flow and balance sheet highlights for the first quarter. After which I'll turn to the business outlook for the second quarter and full year of 2009.

As Chuck mentioned, we delivered strong first quarter financial results. Earnings per share for the first quarter 2009 were $0.36 per diluted share, versus $0.38 of the same quarter last year. Higher interest in other income and lower tax rate in the year ago quarter contributed approximately $0.04 in earnings per share to last year's results.

Relative to our first quarter 2009 earnings per share outlook range of $0.28 to $0.30, with the midpoint at $0.29, the $0.07 earnings per diluted share out performance versus the mid point range breaks down as follows. Approximately, $0.03 per diluted share is due to a combination of higher than anticipated interest in other income and a lower than projected tax rate.

Approximately, $0.02 was due to higher than anticipated volumes offshore and a resulting favorable mix-shift to higher margin offshore revenues, as well cost efficiencies. And the balance $0.02 per diluted share is due to a shift in timing of some ramp related expenses into the second quarter.

Now turning back to the first quarter 2009 consolidated revenues, although revenues were down two-tenth of 1% year-over-year on a reported basis to 203.2 million, they were up 11.9% on a constant currency basis over the same period.

The communications vertical was up 27%, followed by 9% increase in the financial services vertical. The growth from these verticals was offset by declines in the technology, healthcare, transportation and other verticals.

These declines were largely due to unfavorable currencies in the form of a strong U.S. dollar coupled with some decline in volumes. Operating margins during the first quarter of 2009, were 8.6% versus 8%. It is by a favorable mix-shift to higher margin offshore revenues, cost efficiency and a shift in timing of some ramp related expenses into the second quarter, including trading.

During the quarter, the approximate net operating profit impact of all foreign currencies, including hedges was immaterial. Given the strength in the U.S. dollar relative to the Philippine peso, the Philippine peso hedge experienced a 5.6 million negative swing, more than offsetting the favorable impact to our Philippine peso denominated expenses.

For the second quarter of 2009, we are approximately 70% hedged in the Philippines at an average rate of approximately 43.19 Philippine pesos to the U.S. dollar. Likewise, for the last two quarters of 2009, we are approximately 72% hedged at an average rate of 44.12 Philippine pesos to the U.S. dollar. We have also placed hedges for approximately 30% of our Philippines exposures for the first half of 2010 at an average rate of 50 Philippine pesos to the U.S. dollar.

Now, let me turn to select balance sheet and cash flow items. Our cash and cash equivalents at quarter-end March 31st totaled 209 million, with the 198.7 million or 95% held in the international operations and would be subject to additional taxes, if repatriated back to the U.S.

Cash and cash equivalents declined 10.1 million from fourth quarter 2008. Approximately, 7.4 million of the 10.1 million decline was related to adjustments for foreign currency translation. While the balance was driven largely by capital expenditures, also during the quarter we bought back 224,000 shares at a total cost of 3.2 million.

Cash flow from operating activities in the first quarter of 2009 increased to 8 million, from 1 million in the comparable period last year. The increase in cash flow from operating activities was due to an increase in non-cash reconciliation items as well as better working capital management.

During the quarter, capital expenditures of approximately 11 million exceeded cash flow from operations. At quarter end, we had no outstanding debt. Receivables were at 158 million. Trade DSOs for the first quarter were at 69 days, down one day sequentially and up one day comparably.

The DSOs is split between 61 days for the Americas and 86 days for EMEA. Depreciation and amortization totaled 6.8 million for the first quarter, trailing 12 month return on invested capital was approximately 35%.

Now let's review some seat count and capacity utilization metrics. We ended the quarter with approximately 30,400 seats, split between 24,450 in the Americas region and 5,950 in the EMEA region. The total seat count was up almost 3,100 from the first quarter of 2009 and up approximately 800 seats sequentially. The sequential increase in seats occurred across the U.S., China and the EMEA region.

Offshore seat count at the end of the first quarter was approximately 18,700 or 61% of our total seats versus approximately 17,700 in the same period last year. Capacity utilization rates at the end of the first quarter of 2009 were 77% for the Americas regions and 81% for the EMEA region.

On a consolidated basis, the capacity utilization rate was 77%. Capacity utilization rates in the same period last year were 79% for Americas regions and 78% for the EMEA region. On a consolidated basis, the capacity utilization rate in the prior year period was 79%. The comparable decline in the consolidated utilization rate was due primarily to capacity additions during the quarter.

Now, let me turn to our business outlook. The company's second quarter and full year 2009 business outlook reflects the following assumptions.

First, we expect continued growth in customer cure demand from new and expanded programs with existing clients, as well as client wins primarily within the communications and financial services verticals across the Americas region.

In light of the macroeconomic weakness, this demand is expected to be tempered by some volume declines with certainly existing clients, primarily within the technology vertical and particularly within the EMEA region.

Because the technology vertical, currently 32% of consolidated revenues versus approximately 70% during the 2000-2001 downturn, if disproportionately product driven, it tends to be somewhat discretionary in nature, particularly the consumer side that includes products such as laptops.

In addition, we continue to be impacted by the strengthened U.S. dollar as highlighted in the initial 2009 business outlook, which is expected to negatively impact second quarter and full year 2009 revenues by approximately 25 million and 70 million respectively.

Second, we anticipate new, net new capacity additions of 200 to 300 seats during the second quarter to address the increase in demand mentioned above.

On top of the 800 seats added in the first quarter, we believe we remain on track with the net addition of 1,200 to 1,400 seats for the full year, consistent with our initial 2009 business outlook. Coupled with the expenses associated with capacity additions, the second quarter operating income is also expected to be disproportionately rate down by ongoing ramp related expenses, annual wage increases in certain offshore locations and investments in sales and operating resources.

Ramp related expenses are, however, anticipated to moderate throughout the second half of 2009. And finally, we still anticipate interest income of approximately 500,000 per quarter. And this excludes the potential impact of foreign currency exchange gains or losses and the other income line of P&L.

Considering the above factors, the company anticipates the following financial results for the three months ended June 30, 2009. Revenues in the range of 201 to 203 million, tax rate of approximately 25%, earnings per share in the range of $0.27 to $0.30 per diluted share and capital expenditures in the range of 11 to 13 million.

For the 12 months ended December 31, 2009, the company anticipates the following financial results. Revenues in the range of 831 to 835 million, tax rate of approximately 25%, earnings per share in the range of $1.26 to $1.32 per diluted share and capital expenditures in the range of 29 to 32 million.

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

Charles E. Sykes

Thanks, Mike. I'd like to wrap up the call by just telling our employees worldwide, give them a great big thank you for the great work that they're doing. And considering the currency headwinds in the though macroeconomic backdrop, they've performed admirably, as we delivered strong financial performance during the quarter.

Although, demand has held up well and balanced, we think it is prudent to maintain our cautious optimism, this stands stems from our recognition that there are some variables that are simply beyond our control. In particular, end market demand for our clients, products and services which we previously discussed in the context of EMEA, competitive actions by our peers and political noise from Washington, leave us a little guarded.

And that said the trend toward outsourcing remains favorable and balanced. And as long as we sustain our focus, we believe we are well positioned to capitalize on the opportunities that result from the changing economic landscape.

And with that I'd like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, Mr. Sykes. The question and answer session will be conducted electronically. (Operator Instructions). And our first question comes from Josh Vogel with Sidoti & Company.

Josh Vogel - Sidoti & Company, LLC

Thank you, good morning Chuck, Mike and Subhaash.

Charles Sykes

Good morning.

Unidentified Analyst

Good morning.

Josh Vogel - Sidoti & Company, LLC

First, I was just wondering if you could maybe discuss the magnitude of the wage increases that you're talking about in your guidance? I was just curious, which regions in particular and how much inflation are you actually seeing?

W. Michael Kipphut

Hey, Josh. It's Mike Kipphut. Overall, we're expecting most of the wage increases offshore and that can range anywhere from 2 to 7% excluding Argentina. And then in Argentina, we're seeing some double-digit increases or anticipate some double-digit increases over three different times during 2009. But overall, the magnitude of the wage increases have come down and based on our view currently, it should be in a range of 2 to 7% and perhaps maybe decline a little bit from that as we move onto 2009, depending on the macroeconomic environment.

Josh Vogel - Sidoti & Company, LLC

Okay, great. You mentioned Chuck that, you're winning some new business as volume came out of India. I was wondering is this from, is this business that you're winning from new clients or existing clients?

Charles Sykes

It's actually little bit of both right now Josh. I don't want to perhaps over exaggerate that. But we are seeing right now, it's an interesting trend. The comments that in fact (ph) we've all been reading about some business coming back from offshore, what we're seeing from the most part is India being affected. But we have couple of new clients, and clearly, I am giving you two to three that have recently approached us and we're currently engaged with right now that they're winning the new programs from India over to Philippines.

Part of that few is just kind of the consolidation or movement. Some of them have small operations in the Philippines and they had operations in India. And I think they're just feeling that they're getting better performance our of the Pilipino operations. So, they're just consolidating in this economic environment. And I think that's the majority that's driving there.

Josh Vogel - Sidoti & Company, LLC

Okay. Thanks. And, now you guys obviously didn't a nice job managing your SG&A cost. I was wondering, how much more leverage is there. Are you still targeting areas where significant cost cuts could be made?

Charles Sykes

Well, I don't know about significant cost cuts Josh. The thing that we're doing, I think every company in good times, I mean that's what we do in our personal lives, we have a tendency to perhaps just spend things that are more or less once. And right now, we're just, the message that we've get to out everybody, which we came back from the holidays first sitting here, we just really emphasize being very, very smart and being very, very selective in your investment for growth and in your initiatives. And so we've been able to do that without really having the cutback or fire people and in fact just being really smart.

I mean literally, thinks about travel where we're going to grow and expansions in consulting fees and stuff such as that. We've been able to do it in a way without affecting any of our key strategic initiatives. So, it's something that I think that we can continue to be wise in going forward. And we haven't really had to take any dramatic, but a good economy is scaled on SG&A, I'd say the answer is absolutely.

We still have a -- I won't say we had (ph), but we still have the economy of scale on our corporate cost. And clearly, when you look at some of those facility utilization numbers, we clearly have room to get that up to the 85% plus range. And any time we do that, that's going to help us continue to get some of that economy scale.

Josh Vogel - Sidoti & Company, LLC

Okay. Great. And just lastly, could you maybe give some color on the vulnerability within the technology verticals? Is there any chance that the revenue utilization to your guidance was enough or do you think you're being conservative enough here?

W. Michael Kipphut

It's always kind of hard, I think for us probably too convey to everyone, how we're been aggressive or conservative. I guess I would only point to our past record, I mean for about five years now, I think we've done a pretty good job with meeting or beating our numbers. So we're always trying to bake in as best we can to make an inform decision.

But 30% of our business in total taking all the presentations we've been doing, I mean it does come in at the technology side. It doesn't mean to all technology clients are a problem for us, I mean some of them had a lot of service bent to them. But really the ones that are pushing products in particular are the ones that we've been focused on.

And it's just kind of common sense. I mean the call volume very quickly follows a new product sale and we've been waiting and watching the volumes. And I just want to reiterate, because I think we've talked about this for the last couple of calls, but I think is good that we keep it top of mind, just because the volume is coming down, and what we read in the paper for some of these private companies, doesn't mean it's going manifest itself in an immediate volume decline for us.

That becomes a factor of is that client already outsourcing majority of their business. If they are, then clearly there are lot of opportunities they can move business to us, unless they're using multiple suppliers. And in most cases, most of our clients said today, technology outsourcers quite a bit, but they use a lot of different suppliers. And we are beginning to see opportunities to our variables to consolidate.

And that's why it's so important for us and anybody that's in this business to first and foremost focus on performance, because if you're performance is weak in this environment, it's a really bad situation for you. They'll put a lot of pressure on the pricing or they'll terminate the contract without very little emotion felt to it.

Josh Vogel - Sidoti & Company, LLC

All right, great. That's all I have for now. Thank you very much.

W. Michael Kipphut

Thanks, Josh

Operator

And our next question comes from David Koning with Robert W. Baird.

David Koning, CFA - Robert W. Baird & Co. Incorporated

Yeah, hey guys. Nice job.

Charles Sykes

Hey, David. Thanks.

David Koning, CFA - Robert W. Baird & Co. Incorporated

Yeah. And I guess first of all, just when we look at the margins, it was another really strong margin quarter. You kind of explained some of the reasons why, is it fair tough to expect that as we get towards the end of this year and then into 2010 that you're giving some pretty nice margin benefits between almost as a mix-shift away from EMEA, which is I think your lowest margin segment between Latin Americas, given some of the weakness there. The peso benefit that you should start to get late this year and pretty strong into 2010. And then may be even slower ramps next year. Could all those, I guess generate some margin improvement kind of from where are today.

Charles Sykes

Well, really based on from what we're kind of implying

David Koning, CFA - Robert W. Baird & Co. Incorporated

Or kind of from where we were in Q1, 8.6% margins or so, it just seems like there's a lot of room for or a lot of reasons why margins can continue to get a little better?

Charles Sykes

Yeah. David, you may it sound easy. So thing is that, let me -- the short answer is yeah. We see the past, that but remember and you guys know this all too well following the business. I mean the challenge in this business is -- and this is usually everyone turned on this phone call are seeing the lumpiness.

And so you kind of see that in Q2. We're kind of hitting a lump in this period. But if you work still from the last three, four years, we've had a very nice year-over-year increase in our margins. And you can still see, based on year end, we're still seeing that, a little bit of that increase. And I still think that, I mean that increase at a decreasing rate and I do think that having a business in this space that really is running well, you're probably at a 10 to 11% range. But as I said before, you've really got to get into that that billion mid to a billion level, if we get into those we have opportunities to do that.

And I still see our company, I mean, long term I still see a healthy ability for us to continue to get there. I mean yes we're going to have bumps in a road or these lumpy figures within. And we're on that path. So, now this year, I do think that some of the things that this currency and the hedging and everything does throw a little bit of the strain normally into it and it makes a little difficult sometimes to get a clean picture, but if you think about it in our revenue side, I think and Mike can comment on this perhaps a little more over it. But if you think in the past, where we're making money on the hedges and everything, that was all broke in revenue and then our G&A was taken ahead.

So, actually that kind of hit our margins, there. And now as we go forward, even though you can see the revenue not looking quite as exciting because currency in changes, we're also now not seeing a lot revenue increase from the hedges and we're getting better benefit in G&A. So, that too kind of helps in with the margins, a little bit with this. And because I think some of the comments maybe hey this Q3, Q4 may look pretty aggressive pretty good. But, I think some of that's working its way in there as well.

But, that's just some of the details. I don't really try to get as much into that, if I just focus on the overall health of the business our foundation, if you can hang in there and it's strong based on our performance and if the economy doesn't get the best of our some of clients, and we're able to continue to win this business, we should stay on that nice long-term trajectory. So not really answer your question, but just give you a little color on that.

David Koning, CFA - Robert W. Baird & Co. Incorporated

Yeah, that was great. I guess the other that there is chatter just from Washington about maybe increasing taxes and finding a way to tax operations offshore. That gives very beneficial tax rate. What could be impact, I guess it's probably really hard for you to know now, but you're ready at a 25% tax rate. So, it's not that low, it's not like you're getting a zero percent tax rate on full business. Is there anyway that kind of handicap where tax rates could go loner term?

Charles Sykes

Mike, (inaudible).

W. Michael Kipphut

It's a very difficult question. A lot of what we're hearing right now is probably political. And making sure that the current administration gets credit for some of the revenue generation offset on budget deficits in the future. So it remains to be same exactly where this is going to end up. There's not been enough information that you could or I could really provide any forecast based upon. I think overall, the way I look at it, if you look at our federal tax rate, plus at state tax rate, on a statuary basis, it's generally going to be about 40%.

We're at 25% for various reasons, including tax holidays in certain countries, but it just remains to be same where that could be. And I take to even hesitate to guess other than just keep an eye on the statutory rates at 35 for federal and 40% total including state. And I just want to point out to that that's kind of the highest tax rate on a worldwide basis that most countries pay and I just hate to see the U.S. get into that category overall. And I'll leave the politics on long-term.

Charles Sykes

But, David, weird thing about that the other day, when I keep reflecting, I got to tell you another thing I recall, our client coming to us and saying that they want to ask for our price and they're wanting to outsource because they think it's a tax advantage to them.

I really don't know what they are going to do. I don't really know what the details are in the plans, but the truth is that they made it to where tax is same, you still don't take the effect of the savings of the labor arbitrage that you get. I mean in the end it's what our price per minute (ph) is for us.

And going on to what cash affects cash flow, we're knotting up to make it punitive from then I guess rather different story with it. But I am not sure as I kind of extrapolate out, how I this would change our clients behavior about outsourcing. Because Indiana may just, it may almost increase the appeal for outsource and not do their own captive centers in offshore. So I don't know. We just have to kind of wait and see.

W. Michael Kipphut

And I do think overall that it will be projecting on the future basis. And it won't affect what we've done in the past?

David Koning, CFA - Robert W. Baird & Co. Incorporated

Okay that's a great answer. I appreciate. I guess just one final one, you still have a big cash balance, it seems like one of the best ways to kind of reduce earnings a little bit would be to go out there and make an acquisition, what I can relate at this spot that are acquisition prices coming down to a point where it's all closer than it's been past.

Charles Sykes

Well, this is little bit anecdotal, but I think in just my own experiences, I think at our own company, there is almost a point where I think that some of these companies maybe need to see their valuations come up just a tad, because no one really unless are in distress really wants to sell their company at the bottom.

And at the same time, the public company, you never want to go out, and look like you paid this exorbitant price. So it's almost like we need things to comeback a little better to close that gap a little bit. And so right now, let's say maybe the deterioration, although it's looking a little better now, than in for the last couple of months, it's almost been too bad.

For people to say, Stay at my company and look at these things. But to your point though, I think there is some, still some good opportunity and we're certainly staying pretty vigilant in our conversations. But again, you've heard it before, we're going to stay very disciplined, we're not going to get down.

David Koning, CFA - Robert W. Baird & Co. Incorporated

Sounds great. Thank you.

Charles Sykes

Thanks.

Operator

And moving, we have question from Matt McCormack with Brigantine Advisors.

Matthew McCormack - Brigantine Advisors

Hi, good morning

Charles Sykes

Hey, Matt.

Matthew McCormack - Brigantine Advisors

Hey, in terms of the lower volumes in the tech vertical, can you talk about I guess when in the quarter you started to see the lower volumes or when did those clients come to you with lower forecast? And than also what specific type of products, are you talking about the handsets, laptops, what have you?

Charles Sykes

I would say in general, we're seeing almost every client that's in the product space outside of maybe some on the communication products. So, PDAs or wireless phones or things such as that. We're seeing almost every client seeing a slowdown in their volume.

And certainly, on the technology side, which is the majority of the product space that we do, we're seeing, but we've had a couple of other housing appliances and things such as that. So I mean, they've come down as well. I don't know what other color, driving on that.

W. Michael Kipphut

Yes. Laptops improved, yes, principally.

Charles Sykes

Yeah.

W. Michael Kipphut

And as far as when we saw it, I mean we did forecast on a monthly basis. And we spent a lot of time on bottom-up forecast and we spent a lot of time with our clients. And, we did start seen a decline, just within this last month more so than previous months.

Keep in mind too, that most products or consumer goods have high volumes in our first and fourth quarter. And, volumes do comedown in the second and third quarter. So, in some cases, you just need to make sure that it's just not a seasonality decline versus an actual volume decline in what they're seeing.

Charles Sykes

Yeah. It's a good point.

Matthew McCormack - Brigantine Advisors

Got it. And then turning to utilization, specifically in the Americas that did come down, what was it offshore and is it all due to -- what's I guess the moving parts of it all due to just higher capacity or is there anything else going on there?

W. Michael Kipphut

Offshore, it did come down to about the 80% level from the 84%. But it's principally capacity additions and timing. We do have some clients moving back and forth from time-to-time that impact that as well. But overall, it's mainly just capacity additions.

Charles Sykes

Matt, just on that, what we do have right now in this environment, again I want to say this, nothing like what we had in '01. I mean our company almost shutdown 70% of our U.S. infrastructure back in the '01 time period and moved it offshore. But what we are seeing is some movement right now, as far as the volumes have begun to come down, and as clients have -- they feel like that they've given us all the business that they can. The next typically gets to other one and start consolidating.

We do have a little bit shifting that's going on. We have some programs right now that we're taking out on Central America and we're putting them to the Philippines. We have some programs right now that we're taking from the U.S. and putting them to the Philippines. And we actually have one client that's actually bringing some business back from the Philippines to the U.S.

So we do have little bit of a shifting and movement that's going on in the base business. The beauty is right now is that we're holding on all of those clients. And it's not super, super material, but some of those things are working their way into the outlook with utilization right now. So it is kind of muddy in the water a little bit. On top of that, we've got some new programs coming in that we're having to build capacity. And once you pull the trigger and you open up the center, bam, you've got that big stuff function of sea.

And now you've got to take a little bit of time to get the ramp. So, we've got all that working right now.

Matthew McCormack - Brigantine Advisors

All right. And then to clarify, you mentioned I think that the largest client is now, I think you said 10.7% and in mix is 5%. And then you talked about a wireless client, is that the largest one now or is that the second largest one?

W. Michael Kipphut

No. I think --

Charles Sykes

We are getting coaching here.

W. Michael Kipphut

You mean the 10.7% client, is it wireless?

Matthew McCormack - Brigantine Advisors

Well, you talked in your prepared comments about, you were either talking about the largest one or the second largest one having multiple --

W. Michael Kipphut

Matt, we'll make it easy for you. The largest client is 18.2.

Matthew McCormack - Brigantine Advisors

Okay.

W. Michael Kipphut

Yes.

W. Michael Kipphut

Okay. And then just last question in terms of FX, if the exchange rates stay where they are right now, should we expect a million dollar benefit per quarter for the next three quarters?

W. Michael Kipphut

I don't see where you're getting that.

Matthew McCormack - Brigantine Advisors

Well, similar do the benefit in the first quarter.

W. Michael Kipphut

I am not really seeing at a million dollar benefit in the first quarter. Oh, you mean on a net basis?

Matthew McCormack - Brigantine Advisors

Yeah.

W. Michael Kipphut

Net basis, no, our impact on margins was negligible, immaterial.

Matthew McCormack - Brigantine Advisors

Okay. Thank you.

Charles Sykes

Thanks, Matt.

Operator

And our next question comes from Bob Evans with Craig-Hallum Capital.

Robert Evans, CFA - Craig-Hallum Capital Group

Good morning everyone and thanks for taking my call.

Charles Sykes

Okay, good morning.

Robert Evans, CFA - Craig-Hallum Capital Group

Just to follow-up Matt's question, I think if. I got it right, I think what you're trying to say is even given the other income line, I guess if rates stay here and currency stays here, I think you got into 0.5 million a quarter, but this quarter came in about 1.5 million, should we see something similar to this quarter.

W. Michael Kipphut

Yeah, you're exactly right and I apologies to Matt, I think he -- exactly what you're saying right now. Yes in other income, both transaction gains and losses, we did have $1 million in income. Basically, we do not provide any type of outlook for those transaction gains or losses in other income, just because it's so volatile and the currency for one thing and then the receivables and payables on timing is pretty volatile overall.

So what I've assumed at this point in time in our guidance is nothing on FX, no gain, no loss, and just solely 500,000 in interest income running through other income.

Robert Evans, CFA - Craig-Hallum Capital Group

Okay, and just to follow that line of thinking, as we look at the full year guidance, I think you outlined maybe those $0.02 - $0.03 that didn't impact to you this quarter, in terms of the taxes and training. That impacts you in this future, but then you've obviously booked the hedge gains and your execution was better, that will stay there I mean for the balance of the year. So, that's why this $0.03 - $0.04 of that is there. Some reason to all that will be offset by something we haven't anticipated going forward or is that just more conservatism, I guess I'm just trying to get sense of, is there something changing to the negative that offsets that that we maybe aren't aware of or is it again conservatism?

W. Michael Kipphut

Yeah, I think overall, what we're seeing Bob is that for the full year. If you look back the first quarter, the volume increases, the cost efficiencies and the delay in ramp expenses that benefited the first quarter will be absorbed by lower anticipated volumes, particularly in the consumer driven business, and particularly in technology and to a certain extent transportation verticals. But we think that will be absorbed later in the quarter, so that net benefit is not been passed for long.

But we also, from the tax standpoint, yeah we went down a little bit maybe gain a $0.01 on taxes, earnings per share in the first quarter. I still anticipate that full effect of tax rate for the full year to be at 25%. And typically, what happens just the way you have account for inter-period effective tax rates, we typically may see a little bit less than 25% in the first quarter and perhaps the second quarter.

But the effective tax rate will go up in the last quarters and could go as high as 28. But certainly, you will see based on our estimates right now, the full year should be right around that 25% level.

Robert Evans, CFA - Craig-Hallum Capital Group

Okay thanks. And can you comment Chuck on the how many seats -- I know you added 800 seats sequentially. Could you give us any color, perhaps in terms of how much -- how many seats or revenue or seats perhaps, was it one in the first quarter. And may be how that compares to what you saw late last year?

Charles Sykes

I know we have a great gap between new business and existing.

W. Michael Kipphut

Yeah, basically, the only metrics that we generally provide is in our revenue increase, if you try to break that down, about 25% of the revenue increase is coming from new clients and about 75% is coming from existing clients. As far as seats and geographic locations, we don't provide any further color on those numbers.

Robert Evans, CFA - Craig-Hallum Capital Group

Okay. What I'm trying to get at is, some of your players will actually say this is the amount of bids I've signed and I know that's something that you've done as much in the past, but --

Charles Sykes

Yeah.

Robert Evans, CFA - Craig-Hallum Capital Group

Trying to get a sense of if you look at Q1 versus Q4 or maybe Q3 last year, how has that -- because seats that gave this quarter were signed say at last year, but they just are rolling out now. Trying to get a sense of what might be signed now that will be rolling out later this year? And how has that gotten better than worst, or stayed about the same?

Charles Sykes

Yeah. Bob, on of the things that you'll notice in this business is that there kind of just nothing vary and here we're stating the obvious, but sometimes number of seats the bigger you get in our infrastructure, I mean if you're growing an absolute dollar basis, so if you do get lot of big numbers in that case and you see your percentage of growth increasing at a decreasing rate, which I think is pretty difficult for any business that's out there over the long-term.

Our magic number for us and for whatever reason, we keep trying to get better and better at it. But it just seems to be that whatever the total capacity is you have about 85% seats that seem to on a good basis stay productive.

Now with that being said, is that when you grow a company from 20,000 seats to 40,000 seats, well if you've got 15% of 20,000, you've got 6,000 of these seats. You take 15% of 3,000, you take 15% over 40, you've got 6,000. So what happens is your ability to grow revenue on a constant absolute dollar basis increases without having to spend money and to build new seats. So it's not always an indicator that when you're adding seats, that things are great. You're getting the business with it, it's more a matter about where that growth is occurring.

For us right now, we're growing in the U.S. and so because of that we are having to build capacity, because we really had no empty seats at all that were available in that regard, but that's one of the reasons why for us, we just kind of stayed focused on just what our numbers are, what percentage new and existing to give you a little more of a flavor and color and some of the other things are just almost details and dynamics that can really have been changing through a lot, depending on the size of the company.

But it is one of the nice things about this business, the bigger you get if you're keeping your business, your cash flow generation actually gets better, because on a constant revenue gross basis, you really don't have to add as many seats to grow, if it's a $600 million a year, the bigger your capacity gets. You don't have to spend money to build new sets. If you're growing everywhere equally. That's always the big trick.

Robert Evans, CFA - Craig-Hallum Capital Group

All right. And maybe seats wasn't the right question, maybe it's just revenue. I guess what I am trying to get at is what's growth in Q1 of new revenue or new business relative to later last year? I mean I loved to know on an absolute dollar basis, but --

Charles Sykes

Yes.

Robert Evans, CFA - Craig-Hallum Capital Group

My guess is you're not going to give it to us. But, so I'm just trying to say if perhaps you signed X in Q1, how does that compare to Y in Q4. And if you don't want to give the absolute number, I am just trying to know it correctionally?

Charles Sykes

Of the 75-25 in the mix we talked I am that's probably I think the most its going on the new side is maybe 60-40

W. Michael Kipphut

Yeah. But, would I was asking for dollars, the revenue growth that potential (inaudible)? And then we don't really give those dynamics other than the fact that we're still coming in pretty good on a quarter, both on a comparable sequential basis. So there's nothing of alarming from that standpoint.

Robert Evans, CFA - Craig-Hallum Capital Group

So, would you say that new business signings is improving over in the end of last year about the same or getting better or getting worse, I am sorry.

W. Michael Kipphut

Yeah, I would say that it's about the same. Thank you thing that's most significant about it. And I have to think about how sometimes we calculate these numbers between new and existing. The thing that's always the best for us is not necessarily the quantity of new business, it really is it strategically positioning you and giving you a new beach add that later maybe a year later, you'd say it's existing, but it's a client if you won, a year ago and now that client is adding thousands of seats.

And we just end up reporting that as existing business, all right. But that's where sometimes to me, I would just focus still in the absolute growth. And usually in this business the number of new clients that you add it's not like there's 100's of companies. It's typically for us in particular, because we are pretty selective and we're trying to be smart about who we bring on.

It's more important to us that there are more key companies and strategic placements of industries that we want to grow. That's really what we end up focusing on the most. And if we're doing that right, you should see that manifest itself in our business that total revenue is growing, and that our mix is staying healthy.

That we're not getting to where we got a client that's 25-30% of our business. Those would be the indicators to me that we're doing that successfully. I am not sure if I could I answer your question, Bob, I know not answering the details you want.

Robert Evans, CFA - Craig-Hallum Capital Group

No, no that's fine. I appreciate it. Thank you.

W. Michael Kipphut

Alright. Thank you.

Operator

And our next question comes from Kevin McVeigh with Credit Suisse.

Kevin McVeigh - Credit-Suisse

Great, thank you. Hey nice job in a tough environment.

Charles Sykes

Thanks, Kevin.

Kevin McVeigh - Credit-Suisse

A quick question, I wonder if you can give us a sense of typically what I'd obviously the U.S. let us into this followed by May, seems like the core volumes are little softer during in the May, versus the U.S. Do you think the U.S. continues to hang in, or maybe the U.S. will some of that trends out of the May end, why that dynamic played up?

Charles Sykes

Well, I think what we have in front of us right now is, I think in the for the U.S. operation, and when said U.S. you are talking the market in general you or are you talking about the centers that were in U.S., for US.

Kevin McVeigh - Credit-Suisse

Just the market overall, I guess. Since call volumes have been coming off in the May a little bit?

Charles Sykes

Yes, yes. I do think that how the puts and takes here are going to come out, would be interesting. But we are still seeing and I think that we still have nice opportunities in the financial services side and certainly in the wireless sector for the U.S. market. I do think that we have a few clients in the product side.

I think things are going little tough for them. When they get out and just read, I can only read and talk to the clients that we have, but I mean there that few clients that I think are in a pretty tough shape. And that may manifest itself to I am sure common sense, they're going to billion coming up and asking for things around support with pricing or they maybe wanting to consolidate, or they maybe want to have some business moved.

Now that's just the state of the economy where it is. The good thing for us Kevin is that again with our risk profile, we're not talking about our largest client that Mike had disclosed in doing it. We're talking about the hundreds of other clients which typically are like 1% of our business. So grand it, even though that maybe working its way in there, it's not a major, major type of hit to the company. It could be a bump in the road. But I think if they can hang in there and our performance is strong, our relationship is good and we stay really smart and very selective in our investment for growth, I think we'll work through this just fine.

Kevin McVeigh - Credit-Suisse

For Chuck, and then obviously you're clearly going to benefit from vender consolidation, how do you think about that today and obviously a much different company than during the last tech downturn. But, as you benefit from that is it what percentage of your clients use multi-vendors? Is there anyway to kind of frame what that opportunity is?

Charles Sykes

Today, I would say that almost 99% of them use multiple suppliers. And that's part of just every clients for the most part. And again, you could imagine, it's kind of common sense, but they are managing their own risk by not giving everything to a supplier.

Now, if their economic situation is forcing them to have to take in a little bit on that on that the risk management strategy. What they'll do then, they'll say okay, let's get it to one supplier maybe two, okay if they're currently four. And that's where our comments about our financial balance sheet and things are actually coming in to play, because they're looking for stability. But I do want to emphasize that that stability another jobs (ph) performance.

If you're not getting it done from, that is always a problem. Certainly, we have to stay very, very focused on that. But if we have good performance with our balance sheet and clients coming in for that, we are usually a very, very strong contender that we will be on the winning side of the consolidation decisions, where we are right now.

Kevin McVeigh - Credit-Suisse

And then, if I could just want to next Chuck, what percentage of the business is you think about the product versus service? Obviously, we're seeing a little more product weakness on the tech side, how does that play out, in terms of percentage?

Charles Sykes

As a total company overall, we have about 30% of our business that release to right down at the product space and the 70% is service. Okay, just the way that set up, that's on the global basis, yeah.

Kevin McVeigh - Credit-Suisse

Thank you.

Charles Sykes

All right. Thank you.

Operator

And we have a question from Shlomo Rosenbaum with Stifel Nicolaus.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Hi, thanks for squeezing me.

Charles Sykes

Hi.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

I just want to understand the parameters of the annual guidance on revenue, the lowering of about 8 million, it seems like that was attributed certainly to volumes, expected volume softness is it coming through. I believe currency is probably, according to my calculations it's likely 12 million to $16 million benefit for you guys. Is the delta like at 20 to $24 million sequential weakening on the volumes is that a fair way for me to think about it?

Charles Sykes

On revenue?

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Yes.

W. Michael Kipphut

No, I think you go back to what we said last quarter in our outlook. And which we reiterated in our opening remarks, for the second quarter on a comparable basis we're looking at about 25 million headwind for the second quarter for the full year it's effective 70 plus million range. So, I guess I don't see where you're getting the other benefit from, perhaps we can talk about this offline. But I just don't see that.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Okay. We could take that offline with calculations those making based on your revenue breakdown. Just a couple of other ones, the guidance for capital intensity implies that the second half going to really trail off a lot and is that just a lumpiness of the business? Is that how should we understand it goes in fits and spurts?

Charles Sykes

Yes, it's practically the lumpiness.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Okay. And then first time I heard called out bad debt expense, was there something meaningful that we should know about or is there something going on in specific clients you could point out which verticals they're in?

W. Michael Kipphut

We still don't know. There's not anything specific what we do every month. And just look at each of our clients and determine what their natural status is, whether it's changed since their last earnings release and where they stand in the world overall their outlooks too.

In looking at the first quarter, we had about a 600,000 provision for bad debts. And that represented and looking at some specific clients and their deterioration of their financial condition, and it also represents the fact that overall in these tougher times that perhaps some clients that are strong right now may turn a little weak. And so we provided a little provision for that as well.

But, overall looking at our 200 plus clients we feel very comfortable where we stand right now, and our collections are good, our DSO went down one day sequentially. So, we're hanging in there. But, the addition of 600,000 just reflects more of the economic circumstances for our clients' financials.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

And one last one, if you could just talk a little bit about the target margins of 10, 11%? Besides just the scale and sort of leveraging, I guess, the SG&A infrastructure, is there anything else different that has to happen within your business?

I mean, you already have a substantial amount of business that's offshore. Are there some specific leverage points that we should think about, that would sort of move you guys up there?

Charles Sykes

Well, the thing for us that we have to always stayed focus on and everything is that we're executing the programs to the way that we price them. And really, if you think in our business, probably the single most, I would say, value driver is this utilization term. And it's our assets, and it's of our people.

So, if there are ways that we can increase the utilization of our people more so, to what we assumed when we priced the program. Certainly, that gives us opportunity for it. But right now, what my modeling and the guidance, I used the word guidance. But, the modeling that I am kind of giving to you is a directional input, is based on the fact that if we execute the program along the assumptions that we use when we price the deal. It then just becomes a simple matter of the growth holding on to your business and making sure that we're managing our G&A costs overhead. That's as simple as it is.

Now, the thing that with the headwind against us, is if we fail to execute, and have and achieve the utilization numbers of our people and things of the program, because for about every one percentage point of utilization will hit you about 80 basis points. I mean, it's almost one-to-one correlation.

So, if you could find a way, if you're running a company today and you've got 40% gross profit margins, and you found a way to get another percentage point of utilization on a consistent basis, you would running about 40.8.

So, I mean it's significant. It can hit you good and bad. Now, it's not that easy to get the increases. But, you can sure mess it up and go to hell. So, a lot of times the goal is just to stay focused on doing what we say we're going to do and execute in the way we priced it.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Okay. And you guys are doing a great job on the margins. And it's really admirable in this kind of economy. I was just wondering a little bit, if you think about some of the M&A prospects that are out there. Does it -- what are you guys looking for exactly? A lot of times M&A is disruptive for a business, and you guys have been very measured in that. I was just wondering, what you are -- not necessarily the criteria, but what kinds of businesses are you looking for?

Charles Sykes

Well today, for us right now, I will say that geographically, really our focus is in the United States. If we do anything outside, I don't want to say we would never do anything outside the U.S. But that is geographically our main focus.

We are -- I don't want to rule out that we would never look at someone that's a competitor in our space. But, if anything did present itself like that we would ideally like it to be a program or a company that would move us into our industries. And those other industries would be things such as healthcare, or if they gave us better presence in government.

Or if it even, maybe increase, perhaps the debt, if you will, on the financial services side. Those would be there. If it's already overlapping in technology and communication, we just really don't really see that making any sense for us.

I mean, the other thing is like, we certainly would look at any of new delivery capability that our company would bring to us. So, if we saw something interesting out there, and whether it's chat or text or home agent or something like that, that would certainly be something that would be appealing to us, just to round out our capabilities.

But, we're not -- the one thing about, if you think about, we have this filter, if you will, that we've built for our company. And we just kind of compare every company through that filter, and we look for cultural alignment. And we do want to stay as close to our core business as we can for as long as we can. Because, you are exactly right in that, I don't know what the statistics are, but what they say 50% or more than $50 (ph), right?

So, we certainly don't want to throw a log in front of the train unnecessarily. And that's why we really stay very disciplined on it. So, just to give you a little color with it, I am giving you too many specifics. But, I hope that helps.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc.

Thank you.

Charles Sykes

Thanks.

Operator

And Mr. Sykes, there are no further questions. I would like to turn the conference back over to you for any additional or closing remarks.

Charles Sykes

Well, thank you, everyone for the questions. And as always, very good and very insightful, and I think your questions actually help us do a better job of running our company in a way we think about it. So, hope everybody has a good day. And we look forward to touching this with you next quarter. Thank you.

Operator

That does today's conference. Thank you for your participation.

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Source: Sykes Enterprises Q1 2009 Earnings Call Transcript
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