Sykes Enterprises, Incorporated Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Sykes Enterprises, (SYKE)

Sykes Enterprises, Incorporated (NASDAQ:SYKE)

Q2 2013 Earnings Call

August 06, 2013 10:00 am ET

Executives

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

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

Analysts

Josh Vogel - Sidoti & Company, LLC

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

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

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

Alfred Victor Tobia - Sidus Investment Management, LLC

Operator

Welcome to the Sykes Enterprises Second Quarter 2013 Earnings 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.

Please note, this call is being recorded.

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

Charles E. Sykes

Thank you, Emily. And good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises Second 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 kick off with some high-level remarks about our operating results and the overall state of our business, after which I will turn the call over to Mike who will walk you through our financials. And then we will open the call up to questions.

Let me begin by saying that I am pleased with our financial results for the quarter. We reported another set of healthy financial metrics. And the numbers were once again 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. During the second quarter, comparable organic and constant currency revenue growth was 5.6%. The last time we posted positive comparable revenue growth was in the second quarter of 2011.

Operating margins came in above what was implied in our business outlook despite heavy investment in capacity additions and ongoing program ramps. Meanwhile, earnings per share were at the top end of the business outlook range despite a higher tax rate, and our balance sheet remained strong even as we invested for growth.

I would now like to comment on the demand environment and operations. On our first quarter conference call, I mentioned that I was encouraged about the outlook for demand in the customer care marketplace, and I am pleased to say that the overall trends we saw in the first quarter from a demand perspective are holding as evidenced by our second quarter results.

Although demand varied by client, it was healthy across the majority of our verticals, including communications, financial services, technology and transportation. These 4 verticals represent close to 90% of our revenues. Drilling down even further, programs in the wireless, broadband, retail banking, tech hardware and software, and airline sectors saw a nice pickup in volume. That, in turn, was a function of share gains from competition and shifts from our clients' in-house operations.

The only exception to the favorable demand backdrop in the second quarter was the healthcare vertical. There, the underlying demand trend has been soft. Any growth comparisons have been skewed further by either temporary programs, pandemic events, the weather or promotional activity around the program. But given the breadth of our service offerings, we are taking steps to bolster our healthcare client portfolio. In all, the overall demand picture remains encouraging for the year.

If current trends hold, the Americas region based on our current year and revenue outlook is on track to generate positive organic revenue growth for the full year, compared with revenue declines in 2 out of the last 3 years. The EMEA region, meanwhile, is expected to deliver revenue growth around the low double-digit range. The last time EMEA delivered this kind of growth was in the 2007-2008 time period.

Turning to operations, I am encouraged by the progress we are making. As part of our effort to merge the Alpine and legacy SYKES at-home platforms, I'm excited to report that we have now completed the platform integration in the United States. Accordingly, I am happy to point out that we have successfully completed the transfer of certain legacy SYKES at-home clients over to the Alpine platform. Meanwhile, we are making headway in leveraging some of the processes and best practices from Alpine across our footprint in order to drive greater productivity over the coming quarters.

Second, with respect to the facility consolidation and transfer efforts, we are hitting all the milestones. We have now formalized the closure of 2 sites in the U.S. I would also like to point out that several of the clients in the closed facilities have agreed to be transferred to our virtual at-home agent platform. The ratio of clients that have migrated to the Alpine platform versus migrating to another brick-and-mortar facility is running at a 5:1 ratio. This is confirmation that the approach we are taking resonates with clients and is leverageable going forward. As success begets greater success in the consolidation of facilities, the heavy lifting around facility transfers is expected to be completed by the third quarter of this year. The net benefit of the above actions should result in tighter supply demand seat capacity dynamics and potentially higher threshold for overall seat utilization.

And finally, we have completed the rollout of our client-centric model throughout the organization. As I've said in the past, this client-centric structure will create internal transparency and accountability up and down the management and operations chain. In turn, this will expedite decision-making, thus enabling us to adapt more rapidly to our clients evolving needs and further cementing our status as a trusted partner.

In conclusion, we are pleased with our second quarter results, and we continue to execute against our strategic and growth objectives. We recognize the task ahead with significant ramps in store, and we remain focused as ever. While the past 3 years have been challenged due to the volatile macroeconomic environment, we believe 2013 will mark an inflection point. With a highly differentiated business model, a healthy sales pipeline, renewed operational momentum and most of all, a sustained focus on our core business, we believe we have the right building blocks to restore our financial profile and unlock the value for our shareholders.

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 second quarter of 2013, after which I'll turn to the business outlook for our third quarter and full year 2013.

During the second quarter, revenues were $304.7 million. They were $1.7 million above the midpoint of the business outlook range, $301 million to $305 million. The revenue increase relative to the midpoint 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, second quarter 2013 revenues were up approximately by 5.6% excluding currency effects in Alpine. This increase was driven largely by the expansion of existing and some new client programs across the following verticals: communications was up 11%; financial services, up 5%; technology, up 2%; and transportation, up 2%, all of which was partially moderated by the healthcare vertical, which was down 22%.

Second quarter 2013 operating margin from continuing operations was 1.8% versus 3.3% in the same period last year. On a non-GAAP adjusted basis, second quarter 2013 operating margin from continuing operations decreased to 3.7% versus 4.7% in the same period last year, with the decrease due to a combination of costs related to seat capacity build-out and client program ramp-ups, some demand softness in the healthcare vertical without commensurate reduction in labor costs and an unfavorable foreign currency movements resulting from appreciating functional currencies versus the U.S. dollar.

Second quarter 2013 diluted earnings per share from continuing operations were $0.13 versus $0.18 in the comparable quarter last year with the reduction due principally to the previous mentioned factors, partially mitigated by a tax benefit during the second quarter of 2013. On a non-GAAP adjusted basis, second quarter 2013 diluted earnings per share from continuing operations were $0.22 versus $0.24 in the same period last year and versus the May 2013 business outlook range of $0.18 to $0.22, with the comparable decrease driven largely by the previous mentioned factors. Relative to the business outlook range, their earnings per share were in line due to a higher-than-expected effective tax rate.

Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 46% of total revenues during the second quarter of 2013, down from 49% in the same period last year due largely to the revenue contribution from the Alpine acquisitions. Excluding the Alpine acquisition, revenue contribution from our top 10 clients was down a tick to 48% from approximately 49% in the same period last year. We continued to have only one 10%-plus client. Our largest client, AT&T, which represents multiple distinct contracts spread across 4 lines of businesses, represented 12.7% of our revenues in the second quarter of 2013, up from 11.6% 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 6.2% of revenues in the second quarter of 2013 versus 6.7% in the same period last year. The percentage decrease stemmed from revenue contribution of Alpine.

On a consolidated basis during the quarter, the approximate net operating impact of all foreign currencies including hedges was approximately $1.7 million unfavorable over the comparable period last year, $200,000 favorable sequentially and roughly $200,000 unfavorable relative to expectations. For the third quarter of 2013, we are hedged approximately 90% at a weighted average rate of PHP 41.16 to the U.S. dollar. For the full year, we are hedged approximately 84% at a weighted average rate of PHP 41.18 to the U.S. dollars. In addition, our Costa Rica colon exposure for the third quarter of 2013 is also hedged approximately 74% at a weighted average rate of 522 -- sorry, CRC 526.94 to the U.S. dollar. For the full year, we are hedged approximately 71% at a weighted average rate of CRC 523.40 to the U.S. dollar.

We'll now turn to select cash flow and balance sheet items. Cash flow from operating activities in the second quarter was $7.2 million versus $20.8 million in the comparable year-ago quarter. The decline in cash flow from operations on a comparable basis was due to a combination of factors, including the timing of receivable collections and other expansion-related uses of working capital. During the quarter, capital expenditures were $13 million. Our balance sheet at June 30, 2013 remains strong with a total cash balance of $167.4 million, approximately $163.3 million or 97.5% of which was held in international operations and would be subject to additional taxes if repatriated back to the U.S.

During the quarter, we repurchased approximately 272,000 shares of our common stock at prices ranging from $15.61 to $16 per share for a total cost of $4.3 million. We have approximately 1.7 million shares remaining under our 5 million share repurchase program. At June 30, 2013, we had approximately $113 million of borrowings outstanding under our revolving senior credit facility with $132 million of undrawn borrowing capacity. Receivables were at $282.1 million. Trade DSOs on a consolidated basis for the second quarter were 78 days, up 1 day sequentially and 2 days comparably. The DSO was split between 77 days for the Americas region and 86 days for EMEA. We collected approximately $37 million of receivables or 11 days worth of DSOs within just a few days after quarter end. Depreciation and amortization totaled $13.7 million for the second quarter.

So now let's review some seat count capacity utilization metrics. On a consolidated basis, we ended second quarter with approximately 40,300 seats, down 1,200 seats comparably and 100 seats sequentially. The comparable decrease in seats was driven principally by rationalization of capacity in the Americas region. The second quarter seat count can be further broken down to 34,500 in the Americas region and 5,800 in the EMEA region.

Consolidated offshore seat count at the end of the second quarter was approximately 22,000 or approximately 55% of total seats. Capacity utilization rates at the end of the second quarter of 2013 were 74% for the Americas region, 81% for the EMEA region. The capacity utilization rate on combined basis was 75%, up from 70% comparably and 73% sequentially. The increase in the consolidated capacity utilization rate was due to program ramps coupled with a reduction in overall capacity and a shift in timing of certain capacity additions to the third quarter.

Now let's turn to the business outlook. First, we expect the overall revenue and diluted earnings per share outlook for the full year 2013 to remain consistent with our May 2013 business outlook.

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

Third, we have merged the Alpine and Sykes legacy at-home agent platforms in the U.S. Additionally, we remain on track to complete the operational integration of the Alpine acquisition during 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. During the second quarter, we added approximately 1,200 seats on a gross basis while net seats declined by approximately 100 seats sequentially. For the first 6 months of 2013, we added approximately 2,700 seats on a gross basis with the net seat count up by approximately 1,100. Total seat count on a net basis for the full year is still expected to increase by approximately 1,000 seats as the number of anticipated seat additions in 2013 are related to facility transfers.

Fourth, we anticipate interest and other expense of approximately $900,000 for the third quarter and $2.7 million for the full year 2013. Included in these amounts is the net interest expense of $400,000 and $1.5 million for the third quarter and full year 2013, respectively, related to the debt associated with the acquisition of Alpine.

And finally, we anticipate full year 2013 effective tax rate to remain unchanged relative to our May 2013 business outlook. Considering these factors, we anticipate the following financial results for the 3 months ended September 30, 2013: revenues in the range of $305 million to $310 million; an effective tax rate of approximately 36%; on a non-GAAP adjusted basis, an effective tax rate of 36%; fully diluted share count of approximately 42.8 million; diluted earnings per share of approximately $0.19 to $0.22; non-GAAP adjusted diluted earnings per share in the range of $0.26 to $0.29; and capital expenditures in the range of $20 million to $25 million.

For the 12 months ended December 31, 2013, we anticipate revenues in the range of $1,230,000,000 to $1,240,000,000; effective tax rate of approximately 25%; on a non-GAAP adjusted basis, an effective tax rate of approximately 27%; fully diluted share count of approximately 42.9 million; diluted earnings per share in the range of approximately $0.89 to $0.98; non-GAAP adjusted 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. Emily, could you do that, please?

Question-and-Answer Session

Operator

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

Josh Vogel - Sidoti & Company, LLC

Chuck and Mike, regarding EMEA, you're obviously seeing very nice growth there, and I was curious just of the growth you saw, was that driven by new logos or existing clients? And can you also talk about the nature of the business you're seeing in the pipeline, whether it's inbound, outbound or collections?

Charles E. Sykes

Yes, we sure can, Josh. I think just to give a little context on the question, I'll remind everybody, in Europe, remember we had eliminated the countries that we felt were problematic for us. We didn't have a particular strong position and particularly given this macroeconomic environment. Second thing is that we needed to obviously get some costs under control once we did that. And the third thing -- and this is what, I think, becomes the most important relative to your question -- is that we structured Europe into 2 components: one that is really focused more on what we call global markets, multinationals; and the other more around central or local clients, if you will, and this is particularly for Germany and the Nordics. I'm happy to report that what we're seeing now is that with this new focused attention with leadership and breaking the market down that way, we are beginning to see a pipeline increase, and we did win a couple of significant programs. In fact, just to give commentary on it, it's the largest programs that we've ever been awarded in a single decision point. Hence, that's the reason why it's making such an impact on the European margins because we did get capacity so tight that when we won this, everything was just a brand-new addition, and the length of the training and everything is pretty significant. The other thing is that it's coming out of the wireless area, which again, for SYKES, has been something we've been focused on for a long time in European marketplace. We still, historically, are pretty much in technology. We have made some good inroads into financial services, and now we're very hopeful this will become another marquee signature program for the wireless sector. The other thing is that the majority of it is all inbound. We do a little bit of collections, but that's only because of the total responsibility that was given to us in the client program. But everything that we're doing is still primarily focused on the inbound business. The sales work that we do is more, which I think is kind of a trend today, not as much around hard, outbound telemarketing but more in what they call sales-to-service in trying to maximize opportunities while you have people on the phone expanding the relationship. So that's still, to us, very much in the inbound, core customer relationship management piece. So I hope that helps you there.

Josh Vogel - Sidoti & Company, LLC

Yes, definitely. And just looking at the capacity around the world, you spent the last few years consolidating centers and getting out of certain countries and lowering the seat count in EMEA. Now utilization has picked up pretty rapidly. How much excess capacity do you have in EMEA before we would see a pretty sizable build-out there? Just looking at your 3 sets of seat counts you give out, it was the only region that was up sequentially. So you know of the 3,000-or-so gross seats you have in a gross basis, how many of those are going to go towards EMEA in the back half of the year?

Charles E. Sykes

On the gross addition, yes. On a...

W. Michael Kipphut

Yes, there's probably going to be approximately 500 added at the back end of the year for EMEA.

Josh Vogel - Sidoti & Company, LLC

Okay. So you think you have enough -- I'm sorry?

W. Michael Kipphut

On a gross basis.

Josh Vogel - Sidoti & Company, LLC

Right, on a gross basis. So you think you have enough capacity in place to handle low double-digit growth in EMEA for several quarters?

Charles E. Sykes

Yes, given the nature of the program that's been awarded to us, it will work that way, yes.

Josh Vogel - Sidoti & Company, LLC

Okay. And if I could just sneak one more in, regarding Alpine, I know you saw low double-digit organic growth year-over-year, but it was down about $6 million sequentially. And I was just curious if that was just seasonality?

W. Michael Kipphut

Yes, it's principally seasonality as we go from Q1 to Q2. It typically, in years past, has dropped anywhere from 15% to 20%.

Operator

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

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

Great. I'm just wondering if we could explore the organic growth a little bit. As you kind of look forward maybe into 2014, what do you think the organic growth is going to settle out at after the restructuring that you've had? And then in particular, maybe just some highlights on where it's going to come? I was a little surprised to see healthcare down so much, but I imagine it's probably Canadian-related or something? Maybe you could just talk a little bit about...

Charles E. Sykes

Yes, yes. Mike, I know as we get into next year, you know we always get a little hesitant with how much stuff in the guidance, things we give, but I can tell you that in a normal -- what I would call a little more of a normal setting for us, we ought to be in the mid-single digit type of range of growth for us as a company. Certainly, that can ebb and flow from quarter-over-quarter. But that's really, I think for company of our size -- and candidly, it actually is a nice steady place to grow in this business. As we're already having to explain in Europe, when we explained in years past, when you get into double digits, it typically does coincide with margin pressure. But if you can get in that mid-single digit on a net new growth basis, that actually is a nice way to grow the company. So that would be our ideal type of goal and scenario on a steady state. Regarding to where the growth would come from, we still, for us -- communication, finance, technology and healthcare are still 4 places today that we still see. Certainly, the story for us has primarily been around communication and financial services over the last couple of years, and I think you're going to still hear a lot from us in those 2 areas. Regarding health care, you are correct that those are a little more acute, I would say, to SYKES and just the mix of our clients. We had some offshore. Yes, we do have a large program in Canada that the volumes going up and down for a number of reasons can affect the overall growth profile. But we are seeing opportunities in that space with the healthcare legislation, and what's driving that is if you read -- as you read the materials, there is significant anticipation that with the new health care legislation, you're going to see a big growth in the individual marketplace. And many of the carriers today, they just don't have the platforms in place to serve a large individual marketplace. Everything has mainly been geared for group insurance. So that is starting to create opportunities and then certainly, just with them trying to get their own cost in line because there are percents, as I think we all have become aware now, that they have to derive or give towards care and not towards administration. So that's also causing them now to start looking at that. And I think with the clarity that people are starting to see now with the law, starting to understand what the implications are going to be in the marketplace, I think we're starting to see more opportunities build up in our sales pipeline in healthcare insurance.

Operator

Our next question is from Dave Koning of Baird.

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

Yes. Good job returning to organic growth again.

Charles E. Sykes

Dave, thank you. Thanks.

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

Yes. And so I guess, first of all, just when we look at the rest of the year, we can kind of back into implied Q4 guidance, and it seems to imply that the margins will probably be somewhere near a targeted 8% to 10% range by Q4. And I'm wondering, is there anything in Q4 that's one-off? Or is -- basically kind of the way that you're guiding to Q3 and then implied to Q4, is that kind of the normalized run rate as we look into the future?

Charles E. Sykes

I don't -- Dave, I don't believe there's anything that I would say is one-off. I think that the nature of what you're seeing that is a little different is just the significance of some of the growth that we're experiencing. And the thing that -- for those of you guys, when you look at that and you think, "Well, you did 5.6% growth. That doesn't seem too crazy." Well, as you think about it, it's how that growth occurs. And we're experiencing a really big ramp-up with a couple of programs in Europe, very good. We're excited about that, but it's causing a disproportionate impact to us right now in the margins. And even in the U.S. right now, a lot of the ramp that we're adding, particularly for all new growth, is all U.S.-based. And those programs, as I've had to explain in the past -- and I know it does sound counterintuitive, when our facility utilization was so low, why in the world are you building centers? And so much of that had to do that where we're growing, we're growing with companies that are giving us big programs. So when they grow, they say, "No, we want a center." They don't give you 100 seats. They don't give you 50 seats. And in order for us to meet their demands and to put them in the right location in communities that we think have long-term viability from a human capital standpoint, labor standpoint, we've had to build new sites. So that's kind of the part to us that we just have a lot of big moving pieces, and that's what's kind of baked into our guidance. But there isn't anything from the standpoint of one-off that's an event-driven type of thing that's going to come and go and that type of thing. I don't know, Mike, if there's more color you can add to that.

W. Michael Kipphut

No, I think that, that answered the question.

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

Okay, good. And I guess my follow-up question just on CapEx being a little higher. I think that's related to Alpine, and I'm just wondering if we should expect CapEx to stay high?

Charles E. Sykes

But anyway you're asking about CapEx?

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

Yes.

W. Michael Kipphut

CapEx side, this year, we did see quite a bit more than usual, and really, as you recall, there's a couple of things going on. First of all, we do have some net seat additions, but we're also -- have some facility transfers that we spoke about previously as it relates to, in particular, the Asia Pacific region. And that, in turn, is part of the reason why our CapEx was a little bit lower than we anticipated in the second quarter. It was primarily a timing situation, but they're all in place now and it's really just a matter of a few weeks. And then if you also recall, we had mentioned that some of these ramps and timing of CapEx with build-out facilities are dependent upon construction and weather and things as related as such. But we're pretty much in line where we thought we would be. It's just that we had a couple of weeks' difference here before some of those seats were -- facilities were placed in service, and that's what's reflected in the results of the second and third quarter.

Operator

Our next question is from Steven Shui with Stifel.

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

Chuck and Mike, so I wanted to dig a little bit more into the free cash flow. I know you guys mentioned that you had some receivable collections at the end of the quarter after the quarter. Should we expect a very strong free cash flow quarter next quarter? Are we going to see a pretty much complete reversal of all the working capital that took away from this quarter next quarter?

W. Michael Kipphut

Yes, you should definitely see that improved. As we've mentioned, we've pretty much collected about 11 days of receivables in just a few days after quarter end. There's always window addressing to a certain extent on every quarter, but this quarter, we seemed to -- we happen to see a little bit more than we normally do. But we don't anticipate that to continue in future quarters, although it may happen from time to time. So no, we do see a significant turnaround, and it -- as it relates to cash flow in the third quarter.

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And a follow-up question. You guys had -- your EPS guidance for the year implies a pretty steep ramp in the fourth quarter. Can you just talk about what gives you comfort in hitting that target and whether you're tracking towards the middle of the range or the upper end of the range?

W. Michael Kipphut

Yes, we're tracking. Therein lies the reason we give ranges. Sometimes we're at the mercy of some of the weather and build-out as what happened in the second and third quarter. And sometimes we're at the mercy of some of the client ramps and timing. They may be a week or 2 difference, and -- but for most part, we're really targeted towards the midrange of the guidance that we do give, and we feel reasonably comfortable. I mean, with the -- with predicting the future, as most companies do have issues and -- with crystal balls as we do, we do -- we approach it primarily from a confidence level of about 90%, 92%. And this is pretty consistent with what we've done in the past, and feel reasonably comfortable with what we've provided the Street at this point.

Charles E. Sykes

And, Steven, I think just to add a little color to that, from my standpoint, the confidence comes from the known things, the known steps that we've taken around our G&A. I mean, that's one thing about when you make cost reductions, it's pretty predictable in that case. But the other thing is the ramps and things that we're talking about, I mean, their done deals. I mean, they're in process and they're happening. That doesn't mean that we can have delays or hiccups or things such as that. But it's a little different than when you're at the beginning of the year and a lot of your guidance is based off of your sales funnel and the confidence that you have in that. So as time goes on, it's -- certainly, we're closer and closer to having more of a run rate and win perspective versus new sales at risk.

Operator

Our next question is from Al Tobia of Sidus.

Alfred Victor Tobia - Sidus Investment Management, LLC

Yes. I was just going to continue on that line of questioning. On 2014 guidance, not to get too into that, but just in terms of looking at where your operating margin should begin to sort of normalize with the mix of work at home now and elimination of the excess capacity in the U.S., do you think that you will return to sort of high historical operating margins?

Charles E. Sykes

Well, the thing that we've always stated and the 8% to 10% that everyone is quoting and referencing and accurately doing so is, again, for us, the expectations that we have to be a $1.2 billion, $1.3 billion company. That's what we believe we should be running at if we're doing a good job. And so any time any company in this space, for that matter, is running at those levels, our expectation is that should be the range, and it is a range because there is seasonality. The business, as some of you guys have described it, is lumpy, so you could see a plus or minus 1 percentage point quarter-over-quarter for getting yearly average. So it's 7% per year, that could be 6% to 8% on any given quarter type of thing. So anyway, I mean, I -- we see the path and the trajectory that we're on to get into that range. And in fact, we're still looking out for Q4 to be entering into that range. So that should position us much, much better going into 2014 to run more consistently around that point. But we'll have to wait as we're getting into our budgeting time, and we starting to looking at all the puts and takes and everything that's coming in and get to that visibility.

W. Michael Kipphut

Typically, we won't provide guidance for 2014 until fourth quarter earnings release. And then what Chuck was speaking to is just generally the trends that we've passed along.

Alfred Victor Tobia - Sidus Investment Management, LLC

I -- no, I guess, my question, just to drill in a little bit, is that if a larger portion of your revenue comes from work at home versus having to -- having a more of a fixed cost, able to then move up the bottom of that range or tighten that range where maybe you would not dip down in the 6% level? Or how does it affect the business going forward? Forget taking the top -- assume the top line range is out to what you think, you get some modest level of organic growth and you're at that 1.2% to 1.3% level. Having a clean year of work-at-home mix in there, does that let you be more -- raise the bottom of your operating margin range?

Charles E. Sykes

Yes, I appreciate your question. I -- the thing that we've -- at least I hope we've done an adequate job in educating everyone about our views on the virtual model is that, granted, it is unmatched compared to brick-and-mortar and flexibility and speed, but it is not immune to some of the challenges of margin pressures when you're ramping up and down. It does perform better from a G&A standpoint, okay, because to your point, you don't have the facilities and everything, but you do have still the ramp expense when you're training people on your hourly basis. And the challenge in it, again, is just -- and giving more clarity with it, most of the virtual at-home people are working fewer than 40 hours. And so in that training ramp time, it can actually be a little bit exacerbated on the labor standpoint. But you don't have the facility expense standpoint. But let me just go to the point, then, you may be saying, "Well, why end up going into virtual?" The thing about virtual is that for us as a company, we have to continue to make investments to say relevant to what we see are the trends of today. Certainly, we did a big job with that when offshoring was relevant. Today, we see virtual being relevant. And the other thing is when we couple all of these collective capabilities together, not that we run them separate and distinct but when we couple them together, it really begins a really nice differentiated business model. And to give you an example of this, here we are doing all of these centers, trying to meet the needs of several clients that are wanting thousands of people, and it's taken us almost a year to build centers and get those things provisioned. For the same number of times, the same number of people, I should say, we just did an agreement where we're ramping in 7 weeks, in 7 weeks, hiring the number of people ready for training that it would take to do a year in brick-and-mortar. So to clients that have needs, that have a fast response time, it's a great unmatched differentiation. But again to us financially, yes, you would still hear us talking about some margin pressures and things and ramping because it still is present. But it's a great delivery model for unmatched speed and flexibility in the eyes of the client, I should say. I hope that helps.

Operator

I'm showing no further questions. I'd like to turn the call back over to Mr. Sykes for any closing remarks.

Charles E. Sykes

Great. Well as always, I really appreciate everyone's interest in SYKES and following the company. And we look forward to updating you guys on our next quarter call. Everybody, have a good day. Thanks.

Operator

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

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