Sykes Enterprises, Incorporated Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Sykes Enterprises, (SYKE)

Sykes Enterprises, Incorporated (NASDAQ:SYKE)

Q1 2013 Earnings Call

May 07, 2013 10:00 am ET


Charles E. Sykes - Chief Executive Officer, President and Executive Director

W. Michael Kipphut - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


Josh Vogel - Sidoti & Company, LLC

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Howard Smith - First Analysis Securities Corporation, Research Division


Good morning, and welcome to the Sykes Enterprises First Quarter 2013 Financial Results Conference Call. [Operator Instructions]

Management has asked me to relay to you that certain statements made during the course of this call, as they relate to the company's future business and financial performance, are forward-looking. Such statements contain information that is based on the beliefs of management, as well as assumptions made by and information currently available to management. Phrases such as our goal, we anticipate and 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.

Charles E. Sykes

Thank you, Youssef, [ph] and good morning everyone, and thank you for joining us today to discuss Sykes Enterprises first quarter 2013 financial results.

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

On today's call, I will make some high-level remarks about our operating results and then the state of the marketplace, after which, I will turn the call over to Mike Kipphut, who will walk you through our financials, and then we will open the call up to questions.

Let me begin by saying that we are off to an encouraging start with our first quarter results. Key financial metrics in the quarter were either above or at the top end of the expectations range.

Let's start with revenues, which were close to the top end of our range. Operating margins came in above what was implied in our business outlook, despite heavy investment in capacity additions and ongoing program ramps. Earnings per share were also at the top end of the range after adjusting for what was in the business outlook. And our balance sheet remains strong, while our solid-risk profile remained largely unchanged.

I'd now like to discuss the state of the marketplace, and in particular, the demand environment. Demand trends, as well as the drivers of growth, continued to track slightly better than what we expected, relative to our initial 2013 business outlook.

Of course with the portfolio of 200-plus clients, there are always going to be puts-and-takes, but on balance, we continue to see program growth across our key verticals, including communications, financial services and technology.

By reporting segments, the Americas region continues to track in line with growth expectations. The EMEA region, however, appears to be pacing better relative to expectations, driven largely by the communications vertical. This is significant, as it highlights both strong sales execution and continued progress toward our vertical diversification efforts in the EMEA region.

In all, we are encouraged by the state of demand, and as such, we are raising our full-year business outlook for both revenues and earnings per share.

Let me now update you on the status of the 3 objectives we highlighted in our previous earnings call.

Regarding the integration of Alpine, both from a platform and operational perspective, we remain on track to completing the transfer of certain legacy SYKES and Home clients over to the Alpine platform. We have already completed a transfer of a marquee client with tremendous success, which will serve as a template for others going forward.

Operationally, we are just beginning to leverage some of the processes and best practices from Alpine across our footprint, which we expect will drive greater productivity over the coming quarters. We will provide you updates on this as the year progresses.

Second, with respect to the facility transfers, as part of our facilities consolidation efforts, we are hitting all the milestones. Although the process has just begun, we have been able to formalize the closure of 2 sites in the U.S. and are working on others.

I would like to point out that several of the clients in the closed sites agreed to be transferred to our virtual at-home major platform, which was one of our key objectives. I would also like to point out that the facility consolidation process is likely to continue throughout the year, because, as we mentioned in our last call, we have to get our clients' approval to proceed with our plans. Meanwhile, we expect some of the more meaningful facility consolidation offshore to wrap up by the third quarter of 2013.

Third, as it relates to the rollout of our client-centric model, we are tracking ahead of plan. We have now in place the final phase of the processes around the client-centric account management model, including the corresponding incentive and compensation mechanisms. We believe this structure will be enable us to grow our business across our targeted verticals in a more sustainable manner.

In conclusion, we are pleased with our first quarter results, and we understand the task ahead as we invest for growth, rightsize our seat capacity and operationally integrate the Alpine Access acquisition.

We remain focused as ever. We recognize the key milestones and the timeframes, within which we need to achieve our objectives, and we hope to ramp up the majority of them by the third quarter of 2013. The end result of all these actions is a business model that is further optimized operationally, strategically and financially. With that, I'd 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 of 2013, after which, I'll turn to the business outlook for second quarter and full year 2013.

During the first quarter, revenues were $301.2 million. They were $1.2 million above the mid-point of the business outlook range, $298 million to $302 million.

The revenue increase relative to the mid-point of our business outlook was driven by run rate demand and new client programs from several clients spanning the communications, financial services and technology verticals.

On a comparable basis, first quarter 2013 revenues were down approximately by 3%, excluding currency effects and the Alpine Access.

First quarter 2013 operating margin from continuing operations was 3.3% versus 5.3% in the same period last year.

On a non-GAAP basis, first quarter 2013 operating margin from continuing operations decreased to 5% versus 6.8% in the same period last year. The decrease is due to a combination of costs related to client-program ramps and facility transfers, high road-side assistance tow claims in Canada due to a colder-than-expected winter, and end-of-life client programs and unfavorable foreign currency movements resulting from depreciating functional currencies versus the U.S. dollar.

First quarter 2013 diluted earnings per share from continuing operations were $0.15 versus 25% -- $0.25 in the comparable quarter last year, but the reduction was due largely to the previously discussed factors, including costs related to client-program ramps and facility transfers, coupled with a higher effective tax rate.

On a non-GAAP basis, first quarter 2013 diluted earnings per share from continuing operations were $0.23 versus $0.32 in the same period last year, and versus a business outlook range of $0.18 to $0.20.

The comparable decrease in earnings per share was driven largely by the previously mentioned factors.

Relative to the business outlook range, the increase in earnings per share was due largely to a combination of ongoing productivity improvements, as well as lower-than-expected effective tax rate and interest and other expense.

Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 46% of total revenues during the first quarter of 2013, down from 49% in the same period last year, due largely to the revenue contribution from the Alpine acquisition.

Excluding the Alpine acquisition, revenue contribution from our top 10 clients would have remained unchanged comparably at approximately 49%.

We continue to have only 1 10%-plus client, our largest client, AT&T, which represents multiple distinct contracts spread across 4 lines of businesses, representing the 11.7% of revenues in the first quarter of 2013, up from approximately 11% in the year-ago period last year.

After AT&T, client concentration dropped sharply. Our second largest client, which is in the financial services vertical, represented only 5.7% of revenues in the first quarter of 2013 versus 6% in the same period last year. The percentage decrease stemmed from a revenue contribution of the Alpine Access acquisition.

On a consolidated basis, during the quarter, the approximate net operating profit impact of all foreign currencies, including hedges, was approximately $2 million, unfavorable over the comparable period last year; $1.7 million unfavorable sequentially; and roughly $400,000 unfavorable relative to expectations.

Looking forward, for the second quarter of 2013, at this time, we are hedged approximately 82% at a weighted average rate of PHP 41.10 to the U.S. dollar. For the full-year, we are hedged approximately 75% at a weighted average rate of PHP 41.08 to the U.S. dollar.

In addition, our Costa Rica colon exposure for the second quarter of 2013 is also hedged approximately 60% at a weighted average rate of CRC 524 to the U.S. dollar.

For the full year, we are hedged approximately 68% at a weighted average rate of CRC 524 to the U.S. dollar.

Now, let me turn to select cash flow items, the balance sheet items. Cash flow from operating activities in the first quarter was negative $12.8 million versus $4.1 million in the comparable year-ago quarter.

The decline in cash flow from operations was due to a combination of factors, including the timing of receivable collections and other expansion-related uses of working capital.

In fact, we collected approximately $25 million in receivables within just a few days after quarter-end.

During the quarter, capital expenditures were $13.1 million. Our balance sheet at March 31, 2013 remains strong, with a total cash balance of $177.8 million, approximately $174 million or 97.8% of which was held in international operations and would be subject to additional taxes if repatriated back to the U.S.

At year-end, we had approximately $111 million of borrowings outstanding under our revolving senior credit facility, with $134 million of undrawn borrowing capacity.

Receivables were at $266.6 million. Trade DSOs on a consolidated basis for the first quarter were 77 days, flat both sequentially and comparably.

The DSO was split between 76 days with the Americas and 84 days for EMEA.

On a consolidated basis, as I mentioned earlier, we collected almost 8 days of DSOs within a few days after quarter-end.

Depreciation and amortization totaled $13.9 million for the first quarter.

Now let's review some seat count and capacity-utilization metrics. On a consolidated basis, we ended first quarter with approximately 40,400 seats, down 600 seats comparably and up 1,100 seats sequentially.

The comparable decrease in seats was driven principally by rationalization of capacity in the EMEA region last year.

While the sequential increase seating capacity is consistent with the seat additions targeted for 2013.

The first quarter seat count can be further broken down to 35,100 in the Americas region, and 5,300 in the EMEA region.

Consolidated offshore seat count at the end of the first quarter was approximately 22,900 or approximately 57% of our total seats.

As for utilization rates at the end of the first quarter of 2013 were 72% for the Americas region and 82% for the EMEA region. The capacity utilization rate on a combined basis was 73%, up from 71% comparably, and down from 75% sequentially.

The increase in consolidated capacity utilization rate was due to program ramps, coupled with the reduction in overall capacity, while the decrease in consolidated capacity utilization on a sequential basis was due principally to capacity additions related to client program wins and facility transfers.

Now, let me turn to our business outlook. Although we remain cautious about the broader macroeconomic environment, we are somewhat encouraged by an uptick in demand trends among select prospects within certain segments of the outsourced customer contact marketplace.

In particular, this demand uptick is being driven by incremental opportunities within the communications vertical in the EMEA region.

As such, we are increasing slightly our consolidated full year 2013 revenue and earnings per share outlook ranges. However, the expenses associated with the program ramps accompanying the revised revenue outlook, coupled with the previously discussed timing of capacity build-outs and transfers in the first half of the year, are expected to significantly impact second quarter earnings per share relative to the first quarter, and to a meaningful extent, third quarter 2013 earnings per share as well.

Furthermore, given the sometimes fluid nature capacity build-outs from program ramps, there remains a possibility for potential shifts in timing of expenses and anticipated revenue generation among quarters through the remainder of the year.

Our revenues and earnings per share assumptions for the second quarter and full year 2013 are based on foreign exchange rates as of April 2013. Therefore, the continued volatility in foreign exchange rates between U.S. dollar and the functional currencies of the markets we serve could have a further impact, positive or negative, on revenues in both GAAP and non-GAAP earnings per share, relative to the business outlook for the second quarter and full year.

We do remain on track to complete the operational integration of the Alpine Access acquisition by the second half of 2013. The integration process is expected to result in long-term operating efficiencies.

We also remain on track to add approximately 6,000 seats on a gross basis in 2013. Approximately 75% of the seat count is still expected to be added in the first half in 2013, with the remainder in the second half.

During the first quarter, we added approximately 1,500 seats on a gross basis, while net seats increased by 1,100 sequentially.

A number of anticipated seat additions in 2013 are related to facility transfers. Total seat count on a net basis for the full year is still expected to increase by approximately 1,000 seats.

Fourth, we anticipate interest and other expense of approximately $1 million for the second quarter and $3.2 million for the full year 2013.

Included in the aforementioned amount is net interest expense of $400,000 and $1.6 million for the second quarter and full year 2013, respectively, related to the debt associated with the acquisition of Alpine Access. The anticipated increase in other expense relative to 2012 is being driven primarily by forecasted foreign currency transaction losses, due to a weakening U.S. dollar, relative to certain functional currencies.

Finally, we anticipate full year 2013 effective tax rate to remain unchanged, relative to our initial 2013 business outlook released in February. For the second quarter, we anticipate a 0% effective tax rate, driven largely by a shift in the mix of earnings between high and low tax jurisdictions.

Considering the above factors, we anticipate the following financial results for the 3 months ended June 30, 2013, revenues in the range of $301 million to $305 million; effective tax rate of approximately 0% on a non-GAAP basis and on a GAAP basis. Fully diluted earnings per share count of approximately 43.1 million; diluted earnings per share of approximately $0.11 to $0.15; non-GAAP diluted earnings per share in the range of $0.18 to $0.22; and capital expenditures in the range of $28 million to $33 million.

For the 12 months ending December 31, 2013, we anticipate the following financial results: Revenues in the range of $1,225,000,000 to $1,240,000,000; effective tax rate of approximately 25% on a non-GAAP basis an effective tax rate of approximately 27%; fully diluted share count of approximately 43.1 million shares; and diluted earnings per share of approximately $0.91 to $1. Non-GAAP diluted earnings per share in the range of $1.19 to $1.28; and capital expenditures in the range of $55 million to $65 million.

So with that, I'd like to open up the call for questions. Youssef, can you do that, please?

Question-and-Answer Session


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

Josh Vogel - Sidoti & Company, LLC

My first question is on Alpine's growth profile. Do you still expect Alpine to basically post double-digit growth even if we exclude the revenue you are buying coming over from legacy at-home work?

W. Michael Kipphut

Yes, Josh. This is Mike. It's still in line with what we initially said in February 2013, our initial outlook. We really anticipate Alpine to be in the mid-teens, quite frankly, without any revenues that SYKES legacy might port over to Alpine. And then SYKES, I think, on a legacy basis, had 2% to 3%. So it's still within the 3% to 5% range overall.

Josh Vogel - Sidoti & Company, LLC

Okay, and the growth you're seeing there, are you signing new logos? Or is it mostly coming from existing clients?

W. Michael Kipphut

It's a little bit of both. But the one thing, Josh, we have to be a little careful about with the Alpine platform is, and actually any part of the platform we have, is just how much growth we're putting on the infrastructure and the management team. So right now, as we have commented in our remarks, we actually have a number of our clients through our site consolidation efforts that have agreed to convert over. That's something we're going to have to manage a little carefully between the time we're trying to get over with the new logos and the time that we would want to get our current clients who want to jump in. So right now I'd say it's about 60% coming from our existing and 40% on the new logos.

Josh Vogel - Sidoti & Company, LLC

Okay, great. And I guess, I'll limit myself to 2. I just want to focus on the guidance for a second, based on what you're saying for the balance of the year, it seems like you're implying that operating margin should be north of 10% in Q4. Is that the case? And I guess, in an environment where we shouldn't expect to see significant seat additions or program transfers, is that a target we can expect to see over the long-term?

W. Michael Kipphut

Yes. We've mentioned ever since February that we expect to exit the year at 8% to 10% operating margin. So with -- particularly with the capacity build-out that we currently have and facility transfers and the ramps we have going on right now, it has a dramatic impact on the second quarter, we still feel comfortable with full year results, so which implies that we'll still maintain that 8% to 10% operating margin as we do exit 2013.


Our next question comes from Eric Boyer with Wells Fargo.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Could you just talk a little bit more about the demand uptick you're seeing, particularly in Europe in the communications vertical? What countries you're seeing that in? And then help us understand your confidence in ramping additional seats there within Europe with the uncertain economic backdrop there?

Charles E. Sykes

Eric, what we did in Europe was, as everyone that's been following us can sure recall, we came out of the countries that, one, we just felt in a difficult economic environment really posed a lot of risk from a labor expense, things that you just can't do, you can't flex your labor as quickly. The second thing we did was we selected markets that we felt we really had a good position of strength and that we could compete. And as a result of that, we went away from having, is treating Europe, if you will, with this homogenous market, where we had 1 leader and underneath that person, a team, we really organized around the 2 areas of Europe that we felt we wanted to put immense focus on. So what you're seeing is today we actually have had success with that focus and self-execution, particularly in what we call Central and North Europe. So throughout the Nordic region right now we've had some good wins particularly in the communication side. And the reason why we like that is not just for the size of the deal that we've won, but also it's very, very important for us, as a company, to continue to find ways to diversify that business. It's not an easy thing to do without making acquisitions, and it just takes time. And once you break into one new vertical and you do a good job with it, you can use that to sort of break into other companies within that vertical. So I think in answer to your question, our confidence comes from the fact that we just we're in Europe and parts in Europe that we have a good position of strength and we think we are organized right to give the appropriate focus to it. That does not take away the concerns and the things that we continue to read about Europe ourselves, and in fact, I guess that's always going to be with us until we feel just much better about the macroeconomic environment. So given what we can see today, I mean, things look pretty good.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Okay, then just, you cited, I think, if I did the math right, some pretty strong growth within your largest client, AT&T. One of your competitors talked about having some volume disruption there. Can you just talk about -- are you gaining share within AT&T? Or just give us any kind of detail you can around that client.

Charles E. Sykes

Yes, this is the thing, in this case when you're competing with the same account, it looks a little more obviously head-to-head as to whether or not you're gaining an account share or not. But in many cases, remember, in our business, not one of us any other competitors really have too much more than 5% of the market share. So many -- so much of the things we're succeeding on has to do with just how our portfolio of business is doing, not necessarily that we're winning or losing at the expense of our competitors. In the case of AT&T, remember, too, that we have 4 different lines of business that we're supporting now. So at this point in time, on the consumer mobility side, we certainly have seen growth, but most of that growth has just come from some initiatives that they're seen within ramps with the launch of the new iPhone that's coming in. And perhaps, in that instance, we've won more. But I don't want to paint a picture that I know not for certain because it could be that some of the competitors that serve that client may have a different line of business in which maybe volumes have gone down. Because you have enterprise, you have Internet DSL, you have business mobility and you have consumer mobility. And we all kind of have our spots in the marketplace there. But I can't say clearly, I mean the relationship is doing pretty well, and we are, at least, happy with our growth that we've got. I can't give a specific as to whether or not at the expense of our competition or not, but certainly things look pretty good for us.


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

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

I want to talk a little bit about utilization. I know that when we look back at EMEA a couple of years ago, we were in the 60s, and now we're -- it looks like were on the low 80s. Can you give us a sense of where you think utilization can go in Americas, especially given sort of the demand backdrop that seems at least stable over the next 18 months?

Charles E. Sykes

Yes. For us to get into the range of the implied guidance, and again, we've been public with this in stating that we -- to Mike's comment earlier, we want to get in that 8% to 10% range. The facility utilization needs to get into that 80% range. With the efforts that we're doing with our site optimization strategies and then just with some of the new program ramps that we've got going on, the trajectory that we're on right now we feel that we are going to exit the year in that 80% range. But to answer your question, is yes, we believe we can get there.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then on that site optimization plan, as we sit here now in May, what are the major risks that you still have to overcome to get through there smoothly? And have we accomplished some of the -- I mean, are some of the risks or major risks behind us with regards to particular clients or disruption with regards to either pricing or other employment issues?

Charles E. Sykes

Yes, so far, the things that we have to do regarding the thing with program ramps, we have a couple of things going on. One is literally just the expense of when you're ramping a new program. Even if you get paid for training, which is not always a given, but we certainly negotiate hard for that is typically set a lower margin. So even if you were ramping into a center that you already have operational that you just had empty seats in, you would still see a deterioration on the margin system of those ramps. The thing that we have got going on right now is that in order to win some of the business that we've got, which is pretty nice-sized programs, is required dedicated centers that were in different locations. So not only do we have a labor expense, now we've got the facility ramp. In terms of risk in that regard, the only risk that I would say that we have and really uses our ability to execute, which I'd put at the lower-end of risk because they feel that they're controllables for us. Certainly, in this environment, I mean, the thing that's just kind of always gives us a little bit above a cautious tone is that our client could call and say, "Hey the volume forecast that we are anticipating from a new product launch or something could change," and that's always out there. But that's not really a likely scenario. The visibility we have there is pretty good. The one that's still a little more difficult takes time is where we have existing facilities that we just don't think are in locations that are going to be competitive that we can put the work very easily. And those are the ones where we have to get the client approvals. And that was where in my comments, I'd said, look, we have 2 sites, we've got eliminated and the good news is, as we had about half of those clients in those sites agreed to go to the virtual platform. The reason why we like that so much is that it minimizes the amount of rehire training that we would have to do if we had to move them to a completely different site. So that part is the one that takes the most effort, but again, our guidance that we've given for the year is not heavily dependent on us getting that client approval; it's more dependent on us successfully ramping the new programs, getting the centers up and running in time to meet the demand and doing that, That's really the majority of what we're focused on and what is dependent on it. I hope that helps.


Our next question comes from Tim Wojs with Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

I guess, just on the demand. I'm trying to get a little bit more color there, I guess. If you look back at the market the last few years, I think, at the beginning of the year, the market has started off a little stronger then tailed off into the summer and into the back half year. So are you guys seeing anything in the marketplace that feels a little bit more sustainable relative to prior years?

Charles E. Sykes

The thing for us that I would say feels better is more of just a base business. Even when we are having the last couple of years, the revenue deterioration, and of course, we're having to use that horrible word, end-of-life for clients, our new sales had always been pretty strong. The problem was it just wasn't enough to really offset some of the softness that we had, and I think that was just to shake out of coming into the year 2010, 2011 into 2012 time period where you had just some client that their volumes were going down. So I think the right now for us is that the demand has always been pretty healthy in the sense that people want to outsource, but it's just the foundations that's been a little challenging. The thing right now that feels better for us is I feel that the foundation aspect just feels a little more solid to us and that the clients that we're serving today I feel like we have a better understanding of where they are in the marketplace, their ability to compete and kind of what their own outlook is for their business. That I think is probably one of the bigger thing more so than just the change in the demand. Because you know, when we get that funneled, and obviously, it's a simple thing I'm about to say, but when you're foundations gets steady, what's nice about that is everything you bring anew is just absolutely total growth. But right now, we're just starting to see things like that shift a little bit.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

That's great. It's good to hear that. And then I guess just a couple of housekeeping questions. On the corporate expense line, it's been a little bit below 4% in the last couple of quarters. Is that something that is just sustainable going forward?

Charles E. Sykes

Yes. I can tell you, long-term, for the way things are modeled, we really, for the size of our company, we don't like it when we see that percent of expense get above 4%. I can tell you that we do have some anomalies that take place, where the timing of certain expenses makes maybe 1/4 or 2/4. It raises its head and pops above that. But I can tell you, as an organization, we are working very hard to keep that very streamlined, be very smart about it. And again, I could just tell your expectation is, we don't want to see it on a sustainable basis, be above 4%. Certainly, we're a company that's running over $1 billion in revenue.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then just on the incremental debt that you added during the quarter, is that something that we should expect you guys to pay off? Or is that a little bit more sustainable as we go forward?

W. Michael Kipphut

Tim, this is going to be dependent a lot on the timing on the ramps and some of the CapEx, so there's some variability there. But I think overall, particularly in the second quarter, with the amount of capital expenditures, which some ramps, which may go over to the third quarter as well, we're going to dip into the credit facility. I think when it all comes down to by year-end, we should be within $2 million to $5 million of where we ended up in 2012.


Our next question comes from Shlomo Rosenbaum with Stifel.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Mike, could you just talk about Alpine's year-over-year growth in the quarter? And are you seeing the business exhibiting operating leverage the way that you would expect from a model like that?

W. Michael Kipphut

Sure. From a year-over-year perspective, for the first quarter, again, looking at a pro forma basis, since we did acquire Alpine in August last year, it's probably pretty close to about 11% growth that are absent any contribution that Sykes legacy clients may have added to that. So once you add that, it gets up to about a 25% level. For the remainder of the year, as I mentioned earlier, we had -- and I still strongly believe that Alpine growth rate, on the revenue side, would be in the mid-teens. And again, that's excluding any clients that roll over from Sykes to the at-home basis. Now from an operating margin standpoint, as we've mentioned when we first acquired them, it gets with the integration being done so quickly, it's hard to keep track of a true Alpine and Sykes legacy basis, and we don't want to spend an inordinate amount of time trying to trace -- chase things like that. But from our perspective, from an operating margin perspective, it is pretty much in line with Sykes operating margin. And it's tracking that direction and don't see any material changes from that at all.

Charles E. Sykes

So I'll add on to that, to what Mike said. I just kind of remind everybody, and granted it's been 9 months, I think, since we ended up making the announcement that we came out with -- one thing that I think I can say from experience now with having a couple of these deals in our space, when you do acquire a company that the new sales funnel for the company, it is pretty common that sometimes things slow down because it's a change and a significant change, and the people that are the prospects for the company want to kind of take a wait-and-see attitude, because they're not quite sure what's going to happen in the integration process. The other thing, too, is, remember, we were very excited not just from the standpoint of growth but from the standpoint of it allowing us to continue to protect account position and get account share within our existing business. So it's going to become difficult when we just look at it as a standalone, because we are really pushing heavily with our existing base of clients, the capabilities that we have in virtual. So you're having, in the earlier question that I was asked today, 60% of the growth in the aggregate coming from our existing base of business is it going to continue to be a big focal point for us, because, again, sometimes we see the best levers for growth with our existing base of clients. So me, to get to Mike's point is we go forward a little more difficult to kind of carve out and just treat it as a standalone because we're really bringing it very much into our company and into our current client base.

W. Michael Kipphut

I might add it's everything we thought it would be. Were still very, very pleased with the acquisition.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

My second question, just focusing again on 4Q '13, the implication is for like a $0.50-plus EPS number with -- again, high operating margins. Could you just as an illustration of the changes operationally that we're going to see in that quarter versus what we're seeing in the first quarter, where you're talking about double the EPS? Can you just walk us through how much more is ramps that are completed? How much more might be leveraging Alpine or anything else that might go into it?

Charles E. Sykes

I think, Shlomo, in this -- without trying to get -- I hate that I feel like sometimes I'm not answering the question as directly as you guys would like, but just wanting to give you color that eating too much detail, I can give you the changes that are going on right now, there's probably about 5 key things that are pulling down the margins where we are. One is the program ramps. And it isn't just ramps in and of itself. They're pretty significant ramps that we've got, That's what we're experiencing just on the labor alone. The second thing is it's a good news, bad news story, but if you want to make it from a standpoint of bad news pulling that margins, in order to meet the new business, we're having to build new facilities. We've got probably simultaneously, right now, going on 4 to 5 new facilities, brand-new facilities that are being ramped in order to meet the program ramps. The other thing is there's no doubt that we have had for Q1, the currency in the Philippines has been a headwind on us, and that's something I think over time we can address as we grow new business and address some of the pricing with the current accounts that we have. But it does kind of hit you when things change over time. The currency will hit you there. The others that we do have some facility transfers that are taking place. This isn't super significant, but in the Philippines, again, for us, in order to get access to better labor markets, in order to get to where we could just get the site optimization that we want in to the Philippines, in order to make sure that we still feel that we have a good competitive position with the quality of our facilities, we are building a pretty significant new center that we have there in Manila. And that's all taken place in this first half of the year. And the last thing that you're seeing was, is a little bit of an anomaly, we've got a change in our business mix. Alpine alone, when you look at the gross margin basis actually pulls down 1 point on gross margin. But on bottom line alike, we do get those economies of scale. So to answer your question, and we see the economy scale with Alpine specifically, yes. We will begin to see economies of scale on the IT infrastructure that it takes to enable that platform. It's similar to what we see the economy of scale on the facilities side, on the brick-and-mortar. And just based on the trajectory of getting these ramps through, these facilities up and running and getting the facility transfers complete and just seeing the scale coming in with some of these new delivery parts like Alpine, it just begins to turn the corner for us at the second half of the year. It's a lot of moving pieces, I know, but that's -- you can see it in our CapEx. We're really heavy. I mean we're looking at almost $41 million to $44 million in the first half of the year, and we're guiding to $56 million to $65 million for the total year. So very, very heavy upfront in the first half of the year. And that's what makes us a little different right now with the timing.


Our last question comes from Howard Smith with First Analysis.

Howard Smith - First Analysis Securities Corporation, Research Division

Question specifically regarding some of the consolidation in the facilities and the timing that you talked about could bleed into Q3, et cetera. Is the risk on the timing primarily internal execution, in terms of how you build those facilities and hire the people and train them? Or is it more in discussions with existing customers about how and when they want to transfer?

Charles E. Sykes

It's more of the discussion of how and when. And just to give you a very simple, a very relevant example. So if you have centers in North Dakota, where you've got all the oil business going on and unemployment is under 4%, it's very difficult in the call center business, particularly when we only think 8% of the working population in any U.S. community wants to work in this industry, given the nature of the work and the salaries that we pay. This becomes improbable for us to be able to sustain that. But meanwhile, we have clients in the Dakotas that are very happy with our performance, but we are sitting with facilities that we just can't get fall. So what happens as you look at some of these things, we have to get the clients to agree to go to a new location that we think gives us better access to labor market. Now we are, of course, getting to incur that training expense, that's the negative. But sometimes, the clients are not really crazy about that location. And it's just something that makes us where we have to engage in the dialogue with them and takes time. And unfortunately, it takes the controllable away from us to where we just have to have another party involved. The thing that again we've been very encouraged about in this, too, was yet another thing we are happy about was the Alpine capability, is that we were able to get at least half of the clients for the 2 sites that we've taken care of already in our plan to agree to go to virtual. So the beauty in that is that literally, we just have to get the agents, so literally, we just have to get the agents, so literally, just go from the center to their homes, and we just have to get them a little bit of training to get them familiar on that platform. And that's a big part of what we're hoping we can convince a number of the clients to do, going forward.


This concludes our question-and-answer session. I would now let's turn the conference back over to Chuck Sykes for any closing remarks.

Charles E. Sykes

All right, thank you, Youssef. And I don't really have any closing remarks other than just to, as always, thank everyone for your participation on the call, the questions and your interest in our company. We look forward to speaking to you guys next quarter. Everybody, have a good day.


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

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