Sykes Enterprises' (SYKE) CEO Chuck Sykes on Q2 2016 Results - Earnings Call Transcript

| About: Sykes Enterprises, (SYKE)

Sykes Enterprises, Incorporated. (NASDAQ:SYKE)

Q2 2016 Earnings Conference Call

August 2, 2016 10:00 AM ET

Executives

Chuck Sykes – President and Chief Executive Officer

John Chapman – Executive Vice President and Chief Financial Officer

Analysts

Mike Malouf – Craig Hallum Capital Group

Bill Warmington – Wells Fargo

Vince Colicchio – Barrington Research

David Koning – Baird

Frank Atkins – SunTrust

Operator

Good morning and welcome to the Sykes Enterprises, Incorporated Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions. [Operator Instructions]

Management has asked me to relay to you that certain statements made during the course of this call, as it 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.

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

Chuck Sykes

Thank you, Keith, and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises second quarter 2016 financial results. Joining me on the call today are John Chapman, our Chief Financial Officer; and Subhaash Kumar, our Head of Investor Relations.

On today’s call, I will provide a brief recap of our second quarter results and talk about the trajectory of the business for the remainder of the year. After which I will turn the call over to John and then we will open it up for Q&A.

For the second quarter, organic constant currency revenues were up 7.4%. Demand was very broad based expanding almost all of our verticals. This was evident as the communications vertical, which is our largest as a percent of revenues rebounded to growth in the second quarter, which was ahead of plan. What was equally noteworthy was the robust revenue growth delivered by Clearlink, which was up around 20% and was accretive to our non-GAAP diluted earnings per share.

Our Company in the strong revenue growth were decent operating margins even as we incurred ramp cost across new and existing facilities and invested for future growth. To put the investments in context, there has been only one other time in the last 10 years where we organically increased our net seat capacity by 12%. And finally, we generated solid cash flow from operations, which was up 37.4% in the quarter ending the quarter with the net cash position despite levering up for the Clearlink acquisition.

So let me talk a little bit about the trajectory of the business. We continue to see some tremendous growth opportunities in the marketplace, while the financial services and communication verticals are leading the way from a demand perspective we are seeing an expansion of a pipeline in other verticals as well. Many of these opportunities have been concentrated in the U.S. with both new and existing clients.

We have added significant capacity and G&A infrastructure to date with incremental additions planned for the balance of 2016. In short, we have had good momentum thus for. However, we have seen significant over delivery of volume from a new client amid ramps as well as in existing client. To put into perspective, the new client has grown from a 100 customer service associates to almost 800 in a span of four months. What has driven the overdelivery in this instance is the disruption caused by the client in integrating a significant acquisition.

While over delivery is not an unusual challenge, it can be if it is sizable in scope and comes in the midst of a ramp that is already moving at a rapid clip. And over delivery of volume from a new client experiencing disruption can meaningfully impact service levels. Although, we have maintained our performance, which is underscored by further expansion of opportunities with the client between now and year-end, it has tested our operational readiness. This has created workforce challenges, which has led to a short-term increase in costs to a service to a client.

In addition to these challenges there are a couple of other cost currents at play. For instance, we have won a significant program expansion with an existing client. However, that expansion has required a client-driven migration from a current facility to a large new site, which is creating short-term duplicated cost. Moreover, the program expansion itself has under grown a mix shift and is now slated to ramp in the fourth quarter, while that delay is impacting revenues from a timing perspective, we’re having to absorb the overhead associated with the large site.

The net of all this is that even though these events have tempered our operational momentum, the drive has not stopped. We believe the factors weighing on our outlook are discrete in nature and more a function of timing, underlying demand fundamentals, still remain healthy and our client relationships are strong. We remain committed to our 8% to 10% operating margin target, even though we will not be in that range this year due to the heavy capacity expansion ahead of revenue growth. Ultimately, these issues will be resolved and we’ll continue to forge ahead.

Lastly, with the acquisition of Clearlink, which deepens our digital capabilities and creates significant differentiation in the marketplace, we’re starting to do joint marketing and outreach to both existing clients and future prospects. We believe having Clearlink’s best of breed capabilities embedded in our service portfolio provides both a good defense and also a better offense against an uncertain macro backdrop. Inducing Clearlink’s unique value proposition with our solid industry reputation, we believe we have a platform that can capture opportunities and sustain a long-term growth momentum, while unlocking value for investors.

So with that, I’d like to hand the call over to John Chapman. John?

John Chapman

Thank you, Chuck, and good morning, everyone. On today’s call, I’ll focus my comment in the second quarter results particularly key P&L, cash flow and balance sheet highlights, after which I’ll come to the business outlook for third quarter and full year. From a revenue perspective, we came in at $364.4 million, which includes up to $8 million of acquired revenues from Clearlink and Qelp.

Excluding Clearlink, second quarter 2016 revenues came in at $328 million above the top-end of our business outlook range of $322 million to $326 million. Roughly half of the revenue outperformance relative to the business outlook was foreign exchange related with the remainder across several clients within the communications, technology and financial services vertical.

On a year-over-year comparable basis, revenues were up 18.5% on a reported basis, and up 7.4% on a constant currency organic basis in the second quarter of 2016. By vertical markets, on an organic constant currency basis, year-over-year growth was fairly broad based spanning almost all verticals.

Healthcare and transportations were both up almost 17%, financial services up almost 15%, the other vertical, which includes retail up 8%, communications up 3% and technology up around 1%. Second quarter 2016 operating margin was 3.7% versus 5.9% in the same period last year with the current quarter results inclusive of the impact of incremental acquisition related amortization and certain transaction costs associated with the acquisition of Clearlink.

On a non-GAAP basis, second quarter 2016 operating margin was 6.1% versus 7.1% in the same period last year, with the delta driven partly by cost associated with capacity additions and the corresponding program ramps coupled with higher intensive compensation.

Second quarter 2016 diluted earnings per share were $0.22 versus $0.31 in the comparable quarter last year. With the decline due to a combination of factors including cost associated with higher levels of comparable capacity additions in ramps, transaction cost related to the Clearlink acquisition, increased incentive compensation and a higher effective comparable tax rate in the second quarter of 2016. All of which was partially offset by lower interest and lower expenses.

On a non-GAAP basis, second quarter 2016 diluted earnings per share were unchanged of $0.36 on a comparable basis versus same period last year due largely to the previous discussed factors. Second quarter 2016 diluted earnings per share, however, was higher relative to the company’s May 2016 business outlook range of $0.29 to $0.31 with the breakdown as follows. Of the $0.06 in out performance relative to the midpoint of the range approximately $0.03 was a combination of lower interest and other expense as well as a lower tax rate and approximately $0.03 was related to the per share accretion from the Clearlink acquisition.

Turning to your client mix for a moment, on a consolidated basis, our top 10 clients represented approximately 50% of total revenues during the second quarter of 2016, up a tick from the year ago period due to the inclusion of Clearlink’s revenues. Absent Clearlink, the top 10 clients, would have remained unchanged comparably. We continue to have only one 10% plus client. Our largest client, AT&T, which represents multiple different contracts including the demand generation business from Clearlink represented 16.4% of revenues in the second quarter of 2016, down from 17.6% in the year ago period.

The inclusion of Clearlink’s revenue increased AT&T’s percentage revenues in the second quarter by 70 basis points. After AT&T, client concentration dropped sharply. Our second largest client, which is in the financial services vertical, represented 6.7% of revenues in the second quarter of 2016 versus 4.7% in the same period last year. The growth in the financial services vertical has been driven by new program wins with existing clients.

Now, let me turn to slide with cash flow and balance sheet items. Net cash provided by operating activities in the second quarter was up 37.4% to $39.1 million from $28.5 million with the increase mostly due to working capital swing factors including the timing of a payroll period. During the quarter, capital expenditures were $18.2 million. Our balance sheet at June 30, 2016 remained strong, with cash and cash equivalents of $273.2 million, of which approximately 89.2%, or $243.8 million, was held in international operations. At quarter end, we had $273 million in borrowings outstanding, net of the $14 million in paydown during the quarter with $168 million available under our $440 million credit

On April 1, 2016, we announced we have closed the acquisition of Clearlink with the purchase price of $207.9 million. We continue to hedge some of our foreign exchange exposure for the third quarter and full year were hedged at approximately 64% and 74% at a weighted average rate of 47.91 and 47.08 Philippine Peso to U.S. dollar respectively.

In addition our Costa Rican colón exposure for the third quarter and full year is hedged approximately 35% and 39% at a weighted average rate of 547.07 and 546.75 colón to the U.S. dollar respectively. Receivables were at $296.4 million. Trade DSO on a consolidated basis for the second quarter were 75 days, down two days sequentially and down one day comparably. The DSO was split 74 days for the Americas and 80 days for EMEA. Depreciation and amortization totaled $17.2 million for the second quarter.

Now let's turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended second quarter with approximately 45,700 seats, up roughly 5,500 seats comparably and up 2,600 seats sequentially. Included in the second quarter seat count are 1,400 seats associated with Clearlink. Year-over-year comparable and sequential seat increases net of Clearlink additions reflect capacity additions for higher projected demand. The second quarter seat count can be further broken down to 39,300 in Americas and 6,400 in EMEA.

Capacity utilization rates at the end of the second quarter of 2016 were 77% for the Americas and 79% for EMEA, versus 79% for Americas and 86% for EMEA in the year-ago quarter. The decrease in the Americas utilization was driven by capacity additions by higher projected demand, while the decline in EMEA was largely due to an exit from a highly utilized facility. The capacity utilization rate on a combined basis was 78% versus 80% in the prior year ago period, with a decline due to capacity additions for higher projected demand.

Now let's turn to business outlook. Our business outlook is updated for the revenue and diluted earnings per share contribution from Clearlink. Clearlink is off to a strong start at second quarter 2016 comparable revenues were up approximately 20% with expectations to meet both revenue and diluted earnings per share accretion targets for 2016. Second, we’re however, adjusting revenue and diluted earnings per share outlook in our customer contact management business down. Although demand levels remain healthy across the financial services and communications verticals, which continue to be significant drivers of growth in 2016, the speedy pace of a planned ramp, coupled with client-driven program migration to a large new site and program changes within a site in the U.S., have created some unforeseen short-term operational drag among few clients.

We believe the dynamics are clear and discrete in nature and more a function of timing. Still the impact to full year revenues relative to your May 2016 outlook and our core business is expected to be approximately $12 million and approximately $0.18 per diluted per share. $0.02 of which is related to incremental seat capacity growth due to still healthy demand. So excluding Clearlink, we’re roughly 2,100 seats in a gross basis in the second quarter with the year-to-date ended June 30, 2016 seat positions totaling 4,500.

The total gross seats planned for the full year excluding Clearlink are now expected to be around 6,900 seats from 5,700 initially projected. We plan to add another 2,000 in gross seats in the third quarter. We however, now plan to rationalize around 1,800 seats in 2016, of which roughly [indiscernible] of already being rationalized. We anticipate a net seat count increase of approximately 5,100 in 2016 versus 2015. The aforementioned net seat increase excludes 1,400 of seat contribution from Clearlink in the second quarter with full year total seat count for Clearlink expected to be roughly 1,500 seats.

The revenues and earnings per share assumptions for the third quarter and full year are based on foreign exchange rates as of July 2016. Therefore, the continued volatility in foreign exchange rates between the U.S. dollar and the functional currencies of the markets we serves should 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 third quarter and full year.

Finally, we anticipate total other interest expense net of approximately $1.7 million for the third quarter and $4 million for the full year 2016. These amounts include the accretion of the contingent considerations, which are expected to be $0.3 million in the third quarter of 2016 and approximately $1.1 million for the year. The incremental interest expense related to the Clearlink acquisition is approximately 900,000 per quarter. The amount in the other interest income expense however excludes the potential impact of any future foreign exchange gains or losses.

Considering the above factors, we anticipate the following financial results for the three months ended September 30, 2016. Revenues in the range of $385 million to $393 million; effective tax

rate of approximately 27%; on a non-GAAP basis, an effective tax rate of 29%; fully diluted share count of 42.2 million; diluted earnings per share of approximately $0.37 to $0.41; non-GAAP diluted earnings per share in the range of $0.46 to $0.50; capital expenditures in the range of $25 million to $30 million.

For the 12 months ended December 31, 2016, we anticipate the following financial results: Revenues in the range of $1.467 billion to $1.48 billion; and effective tax rate of approximately 29%; on a non-GAAP basis, an effective tax rate of approximately 30%; fully diluted share count of approximately 42.3 million; diluted earnings per share of approximately $1.39 to $1.45; non-GAAP diluted earnings per share in the range of $1.80 to $1.86; and capital expenditures in the range of $75 million to $80 million.

With that, I'd like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Mike Malouf from Craig Hallum Capital Group.

Mike Malouf

Hey, thanks guys for taking my questions. Chuck, I know that you’ve talked about the 8% to 10% target for a little while now it looks like we’re going to have delay that now as we sort of get through these growing plans. And I’m just wondering how long do you think it will take to get through these issues as you look out into 2017 is that the year that we finally get there and I guess sort of finally on that 8% to 10% with Clearlink in the mix especially given its sort of superior profitability, it almost looks like the 8% is sure to be off the table. And that maybe it should be 9% to 10% or something like that. And I’m just wondering if you could comment on that as well. Thanks.

Chuck Sykes

Yes. Mike, thanks for the question. So the reason for me always sticking in the 8% to 10% is that – I really just always want to convey to all of you guys that structurally again nothing has changed in the company. But again we’re not immune to having easy vents that will occur from time to time. And this year without a doubt the pace of the capacity expansion running from a net seat count basis 12%, really considerably outpacing our revenue growth that, that’s is very difficult in fact I don’t think its mathematically possible to not get pulled down on your structural operating margin profile.

And then that’s very different when you are running the company and your capacity expansion is pretty much and to sync with your revenue or even in some cases it can be a little less from this standpoint. So that’s the big thing here. 12% and then you look at our revenue growth being in that 6%, 7.4% range and that’s what's going on there. To answer your question as far as when we see that changing provided there is no other surprises from our customers in the way that we’re ramping these things that’s the only dependency that we’re not in control of. We should exit the year to where we’ve got the capacity at work and so as we come into next year, we should be on a much better foundation.

In regards to the Clearlink portion, I certainly appreciate your commentary on that and just your observations, but I – if you would just let us – maybe get this full year behind us and just to make sure that we’ve got our arms around the new entity and everything, so we have better clarity, I would like to just respectfully give me a shot till we get down, we got to give guidance next year. But there is – your expectation when you just think about everything that we conveyed to you about the program and all, we certainly should be able to see improvement in that range, I mean if we take care of the Sykes Legacy profile and that foundation is there and we layer on top.

All right. I don’t want to get into specific, for you. I don’t feel that would be really responsible I mean at this point in time until I feel like we’ve had at least the few quarters working with the guides and seeing how things are going to come through.

Mike Malouf

Okay, good. And I’ll wait a couple of quarters and press on it again. Thanks for taking my questions.

Chuck Sykes

I’ll wait for your question Mike, thank you.

Operator

Thank you. The next question comes from Bill Warmington with Wells Fargo.

Bill Warmington

Good morning, everyone.

Chuck Sykes

Hey, Bill.

John Chapman

Hey, good morning, Bill.

Bill Warmington

So I just wanted to start off by asking about the clients that are creating the issues this quarter to those two clients how big are they as a percentage of revenue.

Chuck Sykes

They are clearly in the operational ones of our top 10 Bill. And actually one of the client, if you look at the – we’ve already disclosed that second largest client has grown significantly. So clearly, one of them the financial services is one. And the other one the brand new client has went from basically 0 to be in and upper part of the top 10. These are major relationships, one of which we’ve had through a long time is now really expanding significantly and the other one is basically brand new two quarters ago, and is on its way to be very material and business thoughts.

Bill Warmington

Now are the clients going to make you hold for this disruption?

Chuck Sykes

No, not in the sense of just and way there is no, they won’t. Now the one thing about it and just to give you context in that, the one financial client we had alluded to in our commentary that, what they wanted to do is, is consolidate one of our current sites that we have into a new big site that we built just for simplicity.

Bill Warmington

Yes.

Chuck Sykes

We have to make kind of risk reward types of decisions and that stuff Bill. And the growth opportunity we have with them and the types of transactions that they’re giving to us now as we look forward, I mean it was worth making that call. Now the other reason why it was worth making the call and just to give you how we look at these things in total context, the site that they were coming out off, which will be towards the end of the year, we were able to sell those existing seats being that they were financial services to win another brand new banking logo. So we felt that it was well worth it to go into system in this effort. So to just give a little more color as to how we make those decisions.

Bill Warmington

Okay.

Chuck Sykes

On the other program around the Telco, I mean it’s just ramping, I mean the only thing that the client really in this case has done is we thought we were going to have a more control pace of ramp and instead they’ve awarded us considerably more business. Now it is against the backdrop of really underestimating of volume that they are receiving. But again for us it’s new business. We’re wanting to add the capacity, it’s just coming at a fast clip, which is requiring us to have to build the excess capacity considerably further ahead of the revenue acquisition in this case.

Bill Warmington

How about you send Chapman over there and have him open up a can of Whup Ass [ph].

John Chapman

Yes, I mean I think, to think that the client is not suffering in the sense well above is wrong, because we know we went through, again as Chuck mentioned here, we got over delivered on volume, sustained over delivery that creates attrition. And new programs you want to de-risk it, they wanted de-risk…

Bill Warmington

Yes.

John Chapman

They are always spending cost and you wanted de-risk it, so it’s on an hourly basis for the first six months, so that we really understand the business. So to some extent we’re both kind of hedged on that. We go ahead with the additional attrition. He’s also suffering, I mean, we get additional attrition…

Bill Warmington

Yes.

John Chapman

Time to compensate it, we handled times go up. He’s got to basically bid more hours. So it’s not like this one-sided relationship here. We are suffering, he’s suffering and we’re both working through that, because we think this is going to be an exciting opportunity for us in 2017.

Bill Warmington

Well, it’s challenging because it’s like you are in a growth paradox if you will. If you grow over a certain level, then it just trashes the margins. And so my question for you is what can you do differently, operationally and with the client relationships to make that not happen in the future or is it just you got – be it that that’s the way through the business and that’s just the way it is.

Chuck Sykes

We haven’t found anything at this point in time that I think would fix that. I’ll tell you that the larger you get and having more presence and empty capacities, so just think about the math, I mean, if you are sitting with 100,000 seats and you’ve got 15% empty, 15,000 and they’re very distributed, you can’t get to the point that your revenue growth is a little more aligned to your capacity growth. But when you have a situation like us just given our current size where we are and we get this lopsided growth to say it’s primarily U.S.-based, we’re having to build capacity to where it’s almost double the revenue recognition we’re going to acquire.

So I think in this case, you may see is the larger you get, you may be able to smooth that out, but there is nothing that gives you a guarantee in that. Now the other thing for us is that we do believe at least the virtual side gives us a little option, but you still have the labor component that will hit you. But at least in that case, you are not sitting there with the brand new big center that you’ve billed that type of thing.

Bill Warmington

Yes.

Chuck Sykes

So we’re continuing to strive to get our clients to want to move more and more, to virtual and work into that, because we think it helps us respond to these types of things better. But that’s still a journey ahead of us, but we’re fortunate we have that capability, as well.

Bill Warmington

Well, thank you very much.

Chuck Sykes

Bill thank you.

John Chapman

Thank you.

Operator

Thank you. And the next question comes from Vince Colicchio with Barrington Research.

Vince Colicchio

Hi, good morning, guys. Chuck, to what extent does your forecast for this year assume that the operating issues get fixed from where are now?

Chuck Sykes

Yes, well, I mean we’re looking at an impact here of 110 basis points to 120 basis points when you get into Q4. And we’re – with the guidance that we’ve given, I mean we’re filling out everything is going to be on pace, the only building caveat for us again is we’re just dependent on those volumes coming in and how they are going to be coming in and getting your staff levels up. But if you just extrapolate out the way we have, we should be fine in where we are.

Vince Colicchio

And to what extent is labor market tighten is contributing to some of your challenges with your telecom client.

Chuck Sykes

Yes. Well, you are touching on the subject that I do believe in the years ahead maybe even coming into next year depending where we are with the elections and everything, I do believe the labor market is going to be a subject that, as an industry. We’re going to have to be talking about in the United States, but given today in the commentary that we’re sharing with you about our numbers and everything, that’s not really the issue that I want to call out.

So I do want to acknowledge your subject there. I think it’s one that we are going to have to look at I want say, we – I mean the industry. But right now for us we’re getting the classroom, filled rates and things and the challenges that when you are ramping so much and you’ve got new team managers and you got to get these guys support and they are just – they are drinking from a firehouse right now on the volume. And it’s just a stressful environment. And particularly when you have new hires coming in, that’s what really can cause your attrition levels to go up.

So the more we get, when the volume level either subside a little bit to where the stress comes off and then as we continue to get more focused on the phones and we just get that stress taken out and our team managers just get more maturity in them coming up. Well, we should see the stabilization taking place. That really is [indiscernible] city issue right now.

Vince Colicchio

And then a couple of questions on Clearlink, could you remind us what the seasonality looks like for revenue and margins for that business?

John Chapman

Yes, Q2 the weakest, Q3 is the strongest. And then the other two are pretty close to each other.

Vince Colicchio

And then with Clearlink, we see consistent acquisitions from them or – and is that really part of your – is that going to be tied into your capital allocation plans? How do you look at that, how do you think about that for the business?

John Chapman

Well the way we look – we clearly did do a number of small acquisitions prior to the purchase of Alpine by ourselves. If you actually look at the growth rate, I mean again you can see the year-over-year seen at 20%. And three quarters of that’s organic. And had we not made those acquisitions, you still would have seen growth rates in the 15 kind of percent number.

And in terms of going forward and we always model them on not doing many acquisitions, and that’s probably we model them that they just need the single-double digit – sorry double-digit revenue growth number. And but we do in order that they will have opportunities in the future. And just like any acquisition strategy that we’ve got if we feel that can add to our platform or add to our capabilities, add our vertical mix and then we would look at doing them like any other acquisition whether it be coming from the Clearlink folks is – their business model and or the core Sykes business.

Vince Colicchio

Okay. Thanks for answering my questions guys.

John Chapman

Yes, thank you.

Operator

Thank you. And the next question comes from Shlomo Rosenbaum with Stifel.

Unidentified Analyst

Hi, this is Adam on for Shlomo. How much of the 9.2% organic constant currency growth in the Americas is due to the speedy ramp?

Chuck Sykes

I would say a significant portion of the growth is these programs absolutely.

Unidentified Analyst

Okay.

Chuck Sykes

The major program wins major, major ramps.

Unidentified Analyst

Got it. What were the program migrations about and how long will you have to do cost associated with those.

Chuck Sykes

Yes, the migration that we’re talking about is in two areas, they had to do on our financial services program and they had to do with moving from one smaller site that we have been operating for a while and consolidating into a larger bigger site, which I had commented earlier we thought it was worth it, because we were able to reposition the folks into a new banking client, which is really good for us. The other thing is just when you get into the types of call types, we started off the ramp handling one type of transaction for the customer and then if they asses the volumes and whether needs where they wanted us to shift. So that calls us to have to do a little bit of retraining with our folks and then just kind of pushed out toward the ramp it’s going to be more completed towards the mid part of Q4.

Unidentified Analyst

Got it, okay. All right, thank you.

Chuck Sykes

Thank you.

Operator

Thank you. And the next question comes from David Koning with Baird.

David Koning

Yes. Hey, guys.

Chuck Sykes

Hi, Dave.

John Chapman

Hi, Dave.

David Koning

Yes. I just had a couple of more questions on Clearlink. One is, is it all-in communication from a vertical standpoint?

John Chapman

No, all-in communications, they’ve got home services includes security as well and we do have some insurance clients, but you’re looking at 90%, I don’t know obviously how this split, but it will be 90% will be Telco.

David Koning

And then the rest is in would have been then financial services, would that be it.

John Chapman

No…

Chuck Sykes

Moving into insurance.

John Chapman

Insurance, yes.

David Koning

Insurance, okay. It’s – okay, okay.

Chuck Sykes

That implies a nice synergy that we’re looking for there. David as we look at our growth in the healthcare insurance marketplace, we think that capability that they have in the investments they’ve been making will help us accelerate our growth even further.

David Koning

Got you. Okay. And does that insurance offer you though into other or into financial services.

John Chapman

Financial services and the security type clients they will go end up other.

David Koning

Okay, awesome, all right. And then I know you mentioned Q3 there is seasonality in Clearlink. Is it so much so that, well, I guess the best way to ask this question organic growth seems like it accelerated really nice in Q2? It sounds like it’s going to accelerate further in Q3, but I guess it just depends if Clearlink is a lot over $40 million, $45 million in Q3 then maybe core organic growth doesn’t accelerate, but it doesn’t seem – like to me it feels like $38 million to $40 million might be the right number for Clearlink in Q3?

John Chapman

Yes, we are not going to – we don’t want to start breaking down our guidance and the components David, I mean [indiscernible]. But what was it you’re absolutely, Clearlink’s growth from Q2 to Q3 is significant and that’s a significant impact as well in our operating margin number to be between Q2 to Q3 Clearlink did a nice improvement for us there. We still got a site runs, but we’ve also got a natural Q2 and Q3 volume increases that are just nothing do with that ramp just the normal and trajectory of our business as we go into Q3. And so yes, Clearlink does help on the growth yes, it does help on the operating margin, but I’d rather keep those one guidance point just now if that’s okay.

David Koning

Okay. That’s fine, that’s fine. It seems like the organic growth continues to accelerate, which is good. And then I guess finally the tax rate I know the last few years have been kind of 25% to 28% this year is about 30. Is part of that because of Clearlink I’m just wondering if as we look longer term is the tax rate just naturally a little higher than it historically was because Clearlink is a U.S. company.

John Chapman

Yes, again if you think about what we’re talking about today is all about domestic U.S. growth. This year we clearly got headwinds from ramp and not means whole U.S. they control that keeps the tax rate down a lot, but if you are looking forward Clearlink plus the growth that we got domestically we’re looking at and again, I think we’ve said that just we would probably marks that based on the business that are on low tax rates in terms of our tax rate on a go-forward basis assuming the business we have today in the U.S. rates than where they are. And so we do see they’re still and a lot of our headwind probably in 2017 and going into the tax rate.

David Koning

Got you, okay. Great, well, thank you.

John Chapman

Yes, thank you.

Operator

Thank you. And the next question comes from Frank Atkins with SunTrust.

Frank Atkins

Thanks for taking my questions. I want to ask about the rebound in the communications vertical, who was driving that do you think it share gains, do you think its industry any color on that would be great.

Chuck Sykes

Well. For us in the communications, the number one thing I had to do with those winning, this nice new significant program, which is now going to become a new top 10 client for us. The other thing is with our existing base some of those programs have actually required us to implement some new additional transaction pipes. When you look into communication space, I mean even as you look at the news today, you continue to see that sector making investments in new acquisitions particularly is related to content and every time that takes place with one of our existing clients, it does create opportunities for us to help them convert their existing customers into customers that are now up sold into these additional products and services.

So we’re reaping the benefit of that too with our largest client right now with AT&T and the DirecTV acquisition that’s actually caused us to pick up additional volume there as well. And it also just brings back again just probably – just listen on this, it supports again the logic why our company is making investments in company like Clearlink. We see more and more of that our clients are going to be looking to this channel as a way of doing services to sales that you can create new customers. So that’s part of where we’re getting the growth from.

John Chapman

Yes that is right. And I mean in terms of AT&T we said, we hope that we see less of a reduction in actual prior to this year. Q1 and Q2 is basically flat for our top client, but last year we actually brought revenues of Q1, Q2 to $6 million, so that goes down with what Chuck seeing there while picking up and new volumes in light of [indiscernible] and DirecTV.

Chuck Sykes

Yes. Just look at our foundational little bit on the comparable yes, for them…

John Chapman

Yes.

Chuck Sykes

There it down, but if not for those transaction. It could have been there more, so it did make our foundation sold.

Frank Atkins

Okay, that’s helpful. And then going forward as you think longer-term, can you describe some of the kind of levers for driving margin at a business like Clearlink, my understanding is there has been some investments in that business in the past and just kind of where could that go and how would you get there.

Chuck Sykes

Well, some of the things just getting down to the plane kind of bread and butter part of the business that we know very, very well. And that’s the support center operations where they are actually converting the leads into sales, one of the things that the leadership of the Clearlink company what they are doing is they are really interested in our virtual capability, which would allow them to very quickly ramp up to meet demand that they are generating on behalf of these global brands and do it without having to build the sites.

It’s a little early to tell we certainly had a lot of components in it but they are assessing it with their knowledge and know how to see how it works, but I know they are very encouraged by what they see in that. So I think that would help us a lot in two levels, one just very quickly capturing revenue and two, doing it more efficiently without having to go and build the facilities and everything.

The other thing on top of that is when you think about the revenue per employee in our typical business we’re probably sitting somewhere in the range of call it $42,000 a year per person whereas they are sitting in the range of more to be $100 to $130. So what they do is like these small acquisitions that we’re referring to earlier in the call, they will go out and find properties out there that we always kind of use the terms honey pot the website to where they capture more traffic that they then can bring into our centers and convert the leads into sales.

The more effective they can get those conversion rates increasing, which is kind of driven by how good we are in targeting the right customers and having the right offer with the right people handling the transactions, we’re able to generate higher revenue per person. And it’s nice to have that omen in the company, because we’re to a considerable extent we’re in control of that whereas on our traditional business with speed for service. And we’re only as good as how many hours we get people to work and so forth so on. Just to give you a little comment here I think that’s something later as we continue how we built to explain a little more in detail as we do road trips and get out and chat with the new you guys.

Frank Atkins

Okay, that’s helpful. And last one from me no one asked it yet around EMEA and Brexit, your business is not what I would describe is very discretionary in nature, but are you seeing any fluctuations in volumes at this point in some of those regions or do you anticipate any impact going forward as you talk to the clients in those regions.

John Chapman

Yes. In terms of Brexit, it’s really quite difficult. We’ve got the added complexity if you like being in the UK and being in Scotland, but obviously potentially the Brexit, maybe is not, we really obviously are speaking to our clients we’re not getting many concerns at the moment at globally is 5% of revenue, so it’s not that material to the overall business.

But we do have a large multi-language center in Edinburgh that relies on getting access to the labor to drive solutions for the clients. We have a lot of goals in terms of the Brexit negotiations on the movement of labor we are still positive – that we’ll get a positive outcome for it. There is an uncertainty and it’s as much as in terms of employees as our client and so we’re doing as much as we can to address those concerns, but as based on imperfect information just now, we really don’t know which way the Brexit will go and obviously then for Scotland that largest state is, hopeful that can, so it’s really just keeping an eye on what’s happening and keeping the breathe of all the news I’ve been…

Chuck Sykes

But today’s in our guidance and everything that we’re talking about there is nothing that’s reflected from being impacted by that product.

Frank Atkins

Okay, great. Thank you very much.

Chuck Sykes

Yes. Thanks, Frank.

Operator

Thank you. And that was the last questions, so that does conclude today’s conference call. Thank you for attending today’s presentation. You may now disconnect.

Chuck Sykes

All right. Thank you, everyone. Appreciate it. We’ll talk to you in next quarter. Have a good day.

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