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Executives

Chuck Sykes - CEO

Mike Kipphut - CFO

Analysts

David Koning - Baird

Ty Govatos - C.L. King & Associates Inc.

Josh Vogel - Sidoti

Tom Smith - First Analysis

Bob Evans - Craig-Hallum Capital

Matt McCormack - FBR Capital

Sykes Enterprises Inc. (SYKE) Q4 2007 Earnings Call March 11, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007, Sykes Enterprises Incorporated Earnings Call. (Operator Instructions)

Management has asked me to relate 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 beliefs of Management, as well as assumptions made by and information currently available to Management. Phrases such as our goals, we anticipate, we expect, a similar expressions as they relate to the company are intended to 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 filings with the SEC from time-to-time.

I will now turn your call over to Mr. Chuck Sykes, Chief Executive Officer. Please proceed.

Chuck Sykes

Thank you operator. Good morning everyone and thank you for joining us today to discus Sykes Enterprises fourth quarter 2007 financial results. Joining me on the call today are Mike Kipphut, our Chief Financial Officer, and Subhaash Kumar, our Senior Director of Investor Relations.

Following the typical format of our earnings calls, I will first touch on the highlights of the quarter, and then comment on the macro economic backdrop as it relates to our business. Mike will then discuss the financials for the quarter, after which I will wrap up the call with my closing remarks and then will open the call up to Q&A.

Let me first start by saying that I'm proud of the excellent financial performance our employees worldwide delivered in 2007. Our associates on the front-line, along with their colleagues and all of the supporting functional levels have worked cohesively to make 2007 another record year for Sykes.

And as we end the year on a firm note, we enter 2008 with sound underlying fundamentals. And we are excited about the opportunities that lie ahead. Mike will dwell more into that later.

Before I discuss the highlights of the fourth quarter, I thought it would be a good idea to identify the key factors behind our success over the last three years. While there are many, one thing that emerges is focus. Focus on broadening our base of growth by expanding the number of markets we serve worldwide, today we serve 15 markets globally. Focus on targeting growth verticals and lines of business, and we are now diversified in a meaningful away across the 5 verticals of technology, communications, financial services, healthcare and transportation.

We've also been focused on strengthening our global delivery footprint, in order to enhance our ability to serve the addressable market. Our delivery footprint now spans 18 geographies.

And finally focus on mitigating risk, no single client represents more than 10% of our revenues. We believe that these underlying factors have built a stable platform for growth and performance for the years ahead.

With that, here are some of the highlights from the fourth quarter of 2007. First, we delivered another quarter of record revenues of $197.7 million or 24.6% on a comparable basis. In fact revenue growth accelerated during the fourth quarter. We have now delivered five back-to-back quarters of record revenues and seven straight quarters of high quality double-digit revenue growth rate. Growth was solid across the Americas and EMEA regions, and was broad based. For example, the top 40 clients, who represent over three quarters of total revenues, were up 31.2% comparably.

Second, our US capacity utilization rate, which has averaged around 60% over the last 18 quarters, and has been a focal point of ours, increased to 74% during the fourth quarter. Our focus on wireless retail banking and some technology clients in United States is starting to pay off and has enabled us to ramp up utilization.

Third, we delivered operating margins of 8.4%, excluding the provision, related to legal proceedings in Spain; this is a second straight quarter of 8% plus operating margins, laying the foundation to eventually achieve 8% plus operating margins on a sustained basis.

And finally our top 10 clients, as a percentage of revenues, came in at 37% versus 43% in the same period last year. No single client represented more than 5.7% of our fourth quarter 2007 revenues. We believe our low client concentration percentage is industry leading and more remarkably, it has moved in tandem with revenue growth illustrating that we're growing our existing clients even as we add new clients.

I'd now like to take a moment to comment on the uncertainties surrounding the macroeconomic backdrop. We're often asked how an economic slowdown or recession will affect our business and while we certainly are not a 100% immune to difficulties in the economy, we believe demand for outsourcing services tends to remain intact during good and bad economic cycles. That is, company is outsourcing good times to meet growth demands and increase flexibility, and they outsource in difficult times to reduce current and future operating expenses and conserve capital.

That said, we continue to monitor the macro environment and to ensure that we stay ahead of the curve, we continue to follow sound business practices. These include proactively engaging our existing clients and monitoring their businesses to gauge the impact on demand; constantly evaluating and accessing new client opportunities in the sales funnel to gauge whether the sale cycle is lengthening; and keeping a close watch on the competitive landscape to look for signs of irrational behavior among competitors such as, distress pricing practices, which I would like to add, that to date we have not seen.

Finally, we continue to stay focused on quality execution, as this is our best insurance policy to shore up our revenue base against uncertainty. Since our client base consists of mostly Global 1000 companies, and we have no direct subprime or significant retail exposure, we are a lot different than we were during the last recession in 2001, when we and the industry had heavy exposure to the technology vertical in dotcom companies.

While our crystal ball is by no means perfect, it is our view that if customer care demand softens this time around clients are likely to take there various actions. Among them consolidating vendors to maintain the volume commitments, ensure pricing which means they were likely to eliminate poor quality performers, which we believe would position us well. And as I stated early, companies are more likely to outsource more business.

Based on data from industry analyst firms at least 80% of the customer contact management markets still remains in-sourced and although that varies by vertical in line of business. And as wireless and retail banking lines of business among others emerges new opportunities for us, we believe the addressable market offers compelling growth opportunities, even as we debate the direction of the macro economy.

Now I would like to hand the call over to Mike Kipphut. Mike?

Mike Kipphut

Thank you, Chuck, and good morning every one. On today's call, I will focus my remarks on key P&L, cash flow, and balance sheet highlights of the fourth quarter, after which I will turn to the business outlook for the first quarter and full year 2008.

Fourth quarter 2007 consolidated revenues increased 24.6% to $197.7 million over the comparable quarter last year. That growth was broad based spread across various verticals including transportation, which was up 76%, financial services up 42%, health care 38%, and technology 35%.

Our fourth quarter earnings per diluted share was $0.23. However, excluding the provision related to regulatory penalties, which was $0.3 per diluted share and adjusting for the higher than anticipated effective tax rate, which was $0.4 per diluted share, pro forma earnings per diluted share was $0.30, up $0.10 or 50% year-over-year, and up $0.05 above the midpoint of the 24 to 26 range we provided in our last business outlook. The $0.05 earnings per share delta is attributable to a combination of higher-than-anticipated revenue growth and foreign currency hedge gains as well as improved efficiencies and leverage of operating expenses.

During the quarter, the approximate impact of all foreign currencies including hedges was a favorable $300,000 to operating income that is a $3.4 million foreign currency hedge gain, less $3.1 million net unfavorable foreign currency impact from worldwide year-over-year currency changes. We continue our cash flow hedging program with the Filipino peso and are approximately 70% hedged based on our latest forecast through 2008 at an average rate of approximately 44 Filipino pesos to the US dollar. Keep in mind that 44 rate will change if we layer on additional hedges in the future.

Now let me turn to select balance sheet and cash flow items. Our cash and cash equivalents at quarter end totaled $177.7 million, up $10.7 million sequentially. Cash flow from operations totaled $13 million, while we spent $8.7 million in capital expenditures. Separately at December 31, 2007, the company had short-term investments of $17.8 million within the US in higher-yielding commercial paper with a March 2008 maturity. Upon maturity the proceeds were reinvested in a government security's money market bond.

Approximately $166.4 million or 94% of the fourth quarter cash balance was held in international operations and would be subject to additional taxes if repatriated back to the United States.

At quarter end, we had no outstanding debt, receivables were a $145.5 million, trade DSOs for the quarter were at 66 days, flat sequentially and up 3 days comparably because of extended turns in EMEA. The DSO split between the Americas and the EMEA region were 58 days and 80 days respectively. Depreciation amortization totaled $6.9 million for the fourth quarter; trailing 12 months return on our invested capital was approximately 25%.

Now, let's review some seat count and capacity utilization metrics. We ended the quarter with approximately 26,400 seats, split between 21,000 in the Americas region and 5,400 in the EMEA region. The total seat count was up almost 3,800 seats from the fourth quarter of 2006 and up approximately 400 sequentially. The sequential increase in seats occurred principally in the EMEA region and Latin America.

Offshore seat count at the end of the fourth quarter was approximately 17,100 or 65% of our total seats, versus approximately 14,100 in the same period last year and approximately 17,000 in the third quarter of 2007. Capacity utilization rates at the end of the fourth quarter 2007 were 81% for the Americas region and 75% for the EMEA region. On a consolidated basis, the capacity utilization rate was 80%. Capacity utilization rates in the same period last year were 84% for the Americas region and 80% for the EMEA region.

On a consolidated basis, the capacity utilization rate in the prior year was 83%. The three percentage point year-over-year decline in the consolidated capacity utilization rate was primarily a function of seat additions.

Now, let me turn to our business outlook. The company continues to experience sustained growth in customer contact management demand as it enters 2008, despite the hidden concerns about the economic environment in the US. This demand is being fuelled by new and existing client relationships within the Americas and EMEA regions and broadly across all verticals including technology, financial services, communication, healthcare and transportation. Enabling the demand within those verticals are business lines such as wireless, retail banking, technology, originally equipment manufacturers, and travel portals among others.

The company plans to leverage its existing seat capacity to service this demand and increase its capacity utilization rates worldwide. In addition the company anticipates incremental capacity additions of approximately 3000 to 4000 seats during 2008 and into 2009 spread across geographies within the America and EMEA region.

The majority of these seat additions are expected to be deployed in the second and third quarters of 2008. Early in 2008, the company also expects to incur additional expenses associated with IT and general infrastructure investments in support of its growth objectives.

Approximately 90% of the combined expenditures associated with the incremental seat expansion as well as the IT infrastructure investments and maintenance are anticipated to be evenly distributed over the first three quarters of 2008. Separately, the company expects its first quarter and full year 2008 effective tax rate to be approximately 28%, related principally to the mix of earnings from higher tax rate jurisdiction.

Considering these factors, the company anticipates the following financial results for the three months ended March 31, 2008. Revenues in the range of $200 million to $205 million, effective tax rate of approximately 28%, earnings per share in the range of $0.25 to $0.27 per diluted share, and capital expenditures in the range of $8 million to $11 million.

For the 12 months ended December 31, 2008, the company anticipates the following financial results. Revenues in the range of $800 million to $820 million, effective tax rate of approximately 28%, earnings per share in the range of $1.12 to $1.20 per diluted share, and capital expenditures in the range of $30 million to $35 million.

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

Chuck Sykes

Thanks Mike. In closing, I want to thank all of our employees for a job well done. Our focus has enabled us to post quarter-after-quarter of solid financial performance even as the favorable perceptions about the industry have been shaken due to company-specific issues faced by some players in our peer group. We continue to make strides towards attaining sustainable operating margins. Fourth quarter results are further evidence of that. And as we enter 2008, we are excited about the opportunities that we are pursuing, even amid the relentless flow of negative headlines.

The proactive steps we have taken to manage risk profile positions us well. While we have it timed, it's been label us been two conservative with our cash on our balance sheet. I'd like to say that the prudence has been more a measure of discipline and retention of financial flexibility. And given the current economic environment, we believe we're in a position to judiciously put the balance sheet to work, and we believe the demand for outsourcing and offshoring remains in tack, and we are well-positioned to capitalize on it.

And with that, I'll like to open up the call for questions, operator?

Question-and-Answer Session

Operator

(Operator Instruction)

Your first question will be from the line of David Koning of Baird. Please proceed.

David Koning - Baird

Yeah. Hey, guys. It's like a broken record every quarter. Every quarter I am saying good results again.

Chuck Sykes

Hey, we keep on going dude.

David Koning - Baird

Yes, nice job. Well, first of all just when we do look at the demand environment, you said that it would remain strong and guidance for Q1 is $200 million and $205 million, but if we just annualize that we get to your '08 guidance, which really implies no sequential ramp through the year, and I am just wondering, why you elected to guide that way when it seems like demand continues to ramp?

Chuck Sykes

Yes, one of the things that we've talked about in the past, I think a characteristic of our business is, you guys refer to it as been lumpy. And if you go back and look at the actuals for '07, we had a similar revenue growth rate, where Q1 Q2 were pretty flat. And Dave what I think that really lends itself to what that old straits is, right now we are in the midst of doing some capacity expansion again. And it seems that when we do that, you have a tendency where you can't take a little bit of a breather on revenue top line, and then suddenly you put that new capacity to work. And so, then the growth comes in Q3 Q4. It's not always like that, but we saw the same things just as we were going through the numbers. And then again it's not that, it's never happened before. I think you might look at '07 it was very similar this year. So, we're just seeing the growth hitting more in Q3, Q4 timeframe. Mike is there anything else to add from your view.

Mike Kipphut

No, I mean again as Chuck mentioned, we do have to add capacity. When we do so, it does have an impact on our margins for training and ramp cost. And it does impact our depreciation, when we have to add on additional seats in the facilities. And there's a lead-lag effect accordingly.

David Koning - Baird

Great, that's helpful, and then secondly, Chuck, at the end of your remarks you talked about putting the cash to use. It seems like a lot of your public competitors, many are trading at 10, 11, 12 times forward, and I am sure there is opportunities in the private market to get things now at vastly reduce rates from what you would have been able to year ago. Are there things in your acquisition pipeline that maybe are starting to get closer than have ever been before?

Chuck Sykes

I think that is a fair characterization, we are always asking, it's a logical question what you are going to do with the cash and things. And I know Mike and I have always been fairly consistent in saying that we really do want to invest in the industry, and in the business. But we are and will continue to be very disciplined about that. And certainly the equity markets were making it a bit difficult for us.

We were closed over the last year and half year, but we just weren’t willing to chase the deals to compete against that private equity money. So, we are more confident that we'll be able to make these things happen. Now, that doesn't mean that just because the multiples are down the people are willing to sell their companies for lower multiple. So, you still have to kind of work through that. But I do say David I would agree that your characterizations is somewhat, that we have it in last year and half year, is accurate.

David Koning - Baird

Okay. Great, and then just a final question, this will be the first time that many of us start to rollout '09 numbers and obviously you are not going to give a lot of color on '09. But, given where the pesos is at, and your hedged 70% for '08 at $44 meaning, probably $43 is maybe the average rate you'll pay during the year. And with the peso now at about $41, it seems like we will see a little headwind in to '09 if it just stays at $41. Is it fair to say that, can margins still go up in '09, if the peso just stays at $41 over the next couple of years?

Chuck Sykes

I think that’s a fair statement. Keep in mind, if you think about it, the Philippines in particular has been a major part of our portfolio for the last few years. And the fact that, in a year and a half we are producing this types of margins with the peso going from $52 to even at $40.5, I think is really clear evidence that we've been able to address the issues, either by getting more productive or sometimes we can go to clients; we can expand the base of business, so we get better utilization of our agents or our technology. And then other times we just gone in and had to flat out, ask for price increases. And what we are seeing, and this is anecdotal evidence, but I can tell you now that we have had a number of conversations with our clients. And they have been received rather favorably. I mean when we had to sit down, and talk to them about pricing.

Now if the peso were to strengthen to where it goes stronger than $40, that’s the thing that will be interesting, and that’s what I'm optimistic about right now, is that we are still growing in the offshore location. But what's exciting about our business right now to me is that we are starting to grow here domestically, and we are also getting some of the opportunities over in Europe. We are getting more confident with the investments we've made in our sales engine over there in Europe. So, that’s where, I think the opportunity really lies for us. But David, just going in, if the peso stays around the $41 level, I think we will be able to hold our own pretty good.

David Koning - Baird

All right. Thanks for the help.

Chuck Sykes

Yeah. Thank you.

Operator

Your next question will be from the line of Ty Govatos of C.L. King. Please proceed.

Ty Govatos - C.L. King & Associates Inc.

How are you fellows? Great quarter.

Mike Kipphut

Thanks.

Chuck Sykes

Well. Thank you. Thanks Ty.

Ty Govatos - C.L. King & Associates Inc.

Could you elaborate on the infrastructure spending in the first three quarters and give us some idea how far you are expanding that sales force in EMEA?

Chuck Sykes

Mike, you want to talk on the infrastructure?

Mike Kipphut

Yeah. I look at those are two separate questions. On the infrastructure, IT infrastructure, we're looking at additional items that we need to invest in. Although, they are somewhat discretionary, even at that we want to make sure we don't under invest on the IT side and have to catch up. So it's really just a gradual investment in certain locations. It's not necessarily a refresh but it's a little bit of everything on the IT infrastructure side rather than being that specific and we do anticipate it more so in the first half of 2008, less than the last half.

Ty Govatos - C.L. King & Associates Inc.

Okay

Chuck Sykes

And regarding the sales investment, I think it was maybe three quarters or so ago, we had put in our script, I think in communicating with your guys. So we've made some changes in our organizational structure in Europe. And it takes a little bit of time to get personnel changes in Europe. We can't move quite as fast as you can in the US, but we've added some new folks, in fact, I would say maybe half of the team has been changed. And then at the same time, we've added some additional people into the markets, where we think that we have the best growth opportunities.

And so as this is going to take time, I think we've also said patience and we've had some really nice growth with our current base over there. And what we're getting more optimistic about is that the sales funnel for Europe right now for Sykes is looking better. And that gives us a lot of encouragement as we look at '08, '09. So, without going into too much detail, I really just have to do, we're just some personnel changes and adding to it and we may change in the sales leadership, and that's pretty much it.

Ty Govatos - C.L. King & Associates Inc.

Okay. Thanks an awful lot.

Chuck Sykes

Alright. Thank you.

Operator

(Operator Instructions) Your next question will be from the line of Josh Vogel of Sidoti. Please proceed.

Josh Vogel - Sidoti

Thank you. Good morning.

Chuck Sykes

Hi, Josh.

Josh Vogel - Sidoti

If you have the numbers available, I was curious with the newly added programs mostly in the United States that you've been ramping last quarter. How much did they contribute to the topline?

Mike Kipphut

Well, looking from Q3 to Q4 sequentially, we added in the US wireless as well as retail banking, and some technology industries, and overall, without specific numbers revenues did increase about $4 million. But keep in mind too, you've got rep costs and everything else associated with that. So that certainly did help our utilization to increase in the United States and was a very key to getting us to the 74% utilization rate.

Josh Vogel - Sidoti

Okay. I mean, you're doing a successful job here adding new programs especially in the US. The programs that you've added in the last two quarters, are they now fully ramped?

Mike Kipphut

No. They're not fully ramped. We're still in the process of ramping some. And we're still just backing up a little bit. Our sales funnel is still very substantial and we're continuously adding new clients. I think, we indicated last quarter that it would be the full first half of 2008 that these ramps will take place. And so, we're still in that process. So it's not done by any means.

Josh Vogel - Sidoti

Okay. And you still have some room to go with capacity utilization in the US I was curious of these three to four thousand seats you're planning to build out this year. Are any of them going to be in the US?

Mike Kipphut

Yes they are. Let me give you range of about 30% to 45%, somewhere in there would be US expansion.

Josh Vogel - Sidoti

Okay. And a couple of quarters ago, Chuck, you had mentioned that you're successfully passing through some price increases to your clients, which you expect to start favorably impact your results by the fourth quarter. Did you start to see that last quarter?

Chuck Sykes

Yeah. We have and we continue right now even as we speak. Again, like I said, I always try to give you guys' real data and hard stuff. So I know you just have to take me, my word at it. But I think that by our financials that we're clearly able to do something there and the conversations are going well. We still have some work to do in that area. But right now, I will say that we're still optimistic that clients are open to it.

Josh Vogel - Sidoti

Okay. Great. And just lastly, can you remind us what percentage of your revenue and expenses are denominated in pesos?

Mike Kipphut

I would say overall, about, just on the Filipino pesos, approximately 33 million on a quarterly basis.

Josh Vogel - Sidoti

Okay. Thank you.

Chuck Sykes

Okay. Thank you.

Operator

Your next question will come from line of Tom Smith of First Analysis.

Tom Smith - First Analysis

Hey, guys.

Chuck Sykes

Hey Tom.

Tom Smith - First Analysis

Follow-up on the hedging question there. Have you ever given some rule-of-thumb, talking about a 10% change in peso would change margins by, x degree or percentage or?

Mike Kipphut

Yes, generally in the past I have, let me run through a couple of those, they'll be top-of-mind once again. Generally, and again keep in mind this is generally, out of sensitive analysis, 1% appreciation of the Filipino peso could impact us as much as $0.03 per share. But what you also have to take into considerations is, we are not exposed only to the Filipino pesos, some of that is being offset by positive impacts in the Canadian dollar and the euro. A 1% change in the Canadian dollar impacts us about $0.01 per share on a favorable basis. And the same thing on the euro, 1% increase there also impacts us favorably about $0.01 per share.

Tom Smith - First Analysis

Okay. And then just a modeling question for you. It looks like other income fell off by about a $1 million in the quarter, sequentially. And I know there are couple of moving parts there, but I just trying to see if there is a run rate that you think is reasonable going forward?

Mike Kipphut

Yeah, I think it's a little difficult. I am okay with, interest income, interest expense that we have in classified and another income. What becomes pretty difficult overall is the effects or transaction gains and losses and that really depends on the currency. For example, over in Europe if your functional currency is euro and you happen to be holding some receivables in British pounds or in the U.S dollar, and it's not functional currency, you're going to get hit by the impact of collecting that receivable or having that cash on your balance sheet. I understand you want to hedge as much as you possibly can, however, no matter what you do on a worldwide global organization, you're always going to have some type of currencies going back and forth.

I think what really exacerbated our situation in the fourth quarter, was in November, I think, it was November 22nd, in Costa Rica, the Canadian government, it's a moving peg currency, appreciated its currency, moved it from, I guess, about 519 to about 500 Costa Rican colons to the dollar. We were holding some US dollars over there at that point in time, and that certainly impacted our other income, or I should say, other loss in this case. So, historically, if you look at that range, including the transaction gains or losses, it could run anywhere from $200,000 to as much as a $1.2 million per quarter. And it's just dependent again upon, what's happening with the currencies on a worldwide basis.

Tom Smith - First Analysis

Okay, Alright, thanks a lot guys.

Mike Kipphut

Thanks

Operator

Your next question will be from the line of Bob Evans of Craig-Hallum Capital. Please proceed.

Bob Evans - Craig-Hallum Capital

Good morning everyone and nice job on the quarter and the year.

Chuck Sykes

Thank you, and good morning

Bob Evans - Craig-Hallum Capital

Just to follow-up that question, can you give us the ballpark blended rate on what you are getting for interest rate on your cash, that we can at least extract with the currency impact?

Mike Kipphut

Yeah, the average rate for 2007 on interest income is about 3.5%, it's a weighted average.

Bob Evans - Craig-Hallum Capital

Okay. Now obviously, you are going to have a lower rate going into '08.

Mike Kipphut

Yeah.

Bob Evans - Craig-Hallum Capital

Any ballpark range?

Mike Kipphut

No, as it is getting too specific, I mean we have included that with our guidance on the other income and to the fourth quarter and full year.

Bob Evans - Craig-Hallum Capital

Okay, that's fine. And then you had referenced investments that you are making in Europe, can you give us a ballpark idea of how much we are talking about from an investments standpoint?

Mike Kipphut

You mean with the business development and sales?

Bob Evans - Craig-Hallum Capital

Yes, business development of sales?

Mike Kipphut

Yes, I would rather not get that granular. We really don't break it out. It's based on additional compensation that we are paying in Europe, as a whole. And I think we have broken it out a little bit in the K. I just don't remember that number off the top of my head though.

Bob Evans - Craig-Hallum Capital

Is that number expensed?

Mike Kipphut

Yes.

Bob Evans - Craig-Hallum Capital

Okay.

Chuck Sykes

We are mainly just talking about personnel there.

Bob Evans - Craig-Hallum Capital

Okay, I just wanted to know if there is other technology or CapEx.

Chuck Sykes

No, it's mainly compensation expense, termination costs, travel, additional expenses associated, would beef up a good quality sales team.

Bob Evans - Craig-Hallum Capital

Okay. And can you talk a little bit more about your CapEx, where you are spending the money? How much of it is going towards growth CapEx versus maintenance, just give us a little color there?

Mike Kipphut

Just as a general rule-of-thumb, I would still really need to think as 1% or 2% of revenues as maintenance CapEx and the rest is primarily growth and then additional IT infrastructure investments.

Bob Evans - Craig-Hallum Capital

Okay. And Chuck, as it relates to the operating margins, like you said in the past, 7% to 8% potential goals, you've been running at that level now. Looking out two three years, what type of new goals might we have? Or where can you bring us given the margin mix is going your way and you continue to grow?

Chuck Sykes

Yeah, Bob. Comeback over the last couple of years, we'd always been saying that, we would be disappointed just given all the things that are inherent in running and outsourcing call center business, clients ramping up, clients going away and just challenges that you've got with it. We would be disappointed if we couldn't get the Company to where we were running on a sustainable basis, quarter-over-quarter, just every quarter in the range of 6% to 8%.

And keep in mind that we started that conversation back in '04 when we were pretty much at breakeven at that time. But now that we're running, we're in that range -- the answer to your question about long-term aspect whether it is, we certainly believe if we keep that platform steady that at this point in time, the margins are going to improve on the economy of scale that we're going to get in our corporate overhead cost as we continue to grow the topline.

And if you look at on a comparable basis with some of the peers that we have, that are over $1 billion. What I would suggest to everyone is that for about -- it's not exact signs but for about every $80 million in revenue, you're going to look at around probably 40 basis points improvement in operating margins. If you take a company today that's like $1.3 billion, you can see that they're running in 10% margin. So I don't see any reason why we can achieve that as we continue to grow and work our way to be in over $1 billion Company.

Bob Evans - Craig-Hallum Capital

Okay. So, 80 basis point or $80 million of revenue, can you equate the bottom for this point?

Chuck Sykes

Yeah. They were balanced.

Bob Evans - Craig-Hallum Capital

Okay. So ultimately if you get to the scale, you can get to double-digit?

Chuck Sykes

Yeah. Absolutely.

Bob Evans - Craig-Hallum Capital

Okay.

Chuck Sykes

Yes, absolutely, and I'll share that with you because that's kind of way we internally when we want to benchmark against competitors. And if we want to know if somebody really found the way to run something a little better than those, what we do is we just discount for the economy of scale that larger organizations are, and join with the corporate overhead cost. And when you back that off, if you go back and look at some of those guys who are in that space now, I think you'll see that we're doing pretty well for our size in the year end, 710 million or so.

Bob Evans - Craig-Hallum Capital

Alright. I agree. Well, I knew the answer I just wanted to see if you would answer.

Chuck Sykes

You see, Bob, we thought the same way.

Bob Evans - Craig-Hallum Capital

Yeah. I appreciate it. And also can you comment a little bit more in terms of 3,000 to 4,000 seats, where is the demand coming from in terms of new versus existing customers and how much of, I guess looking for a little more granularity in terms of, you don't have say specific customers, but why the growth in terms of is Company X going from 10% outsourcing to 50% outsourcing, give us a little bit more granularity, but also first looking at just kind of clarity on the 3,000 to 4,000 seats, where is that demand coming from?

Chuck Sykes

Well, one of the things that I would first highlight, is that if we were all sitting back just talking about the size, let's talk about the US just for an example. If we were talking about the size of the US market, if you were talking to all of the companies that we compete with today, and I mean they're all, obviously I am not underestimating any of them and their ability or anything, but one thing that's certain is that we don't all have the same opportunity to go after every opportunity in the US

And the reason for that is because some companies are only domestic providers. Some companies are only offshore, and those companies, good or bad, have limited themselves today, the way they're set up today to only address and go after those components of the market that want just domestic or just an offshore solution. And with Sykes, I think the thing that's helping us right now, is that we're able to go and basically any industry in the United States that we want to go knock on the door and call on, there is nothing in our delivery footprint that prevents us from knocking on that door. And if they want domestic, we gave them domestic. If they want Central America, we've got that. If they won't offshore, we've got that. If they want to go to Canada for whatever reason, we've got that.

So, that is one thing that I think is giving us more opportunities just on that simplistic thought with that. The other thing is that I think that some companies and this isn't a criticism, it's just a fact that when you are a certain size, most companies in the service business get a lot of client concentration, and if everything is running fine, it's great. You'll build off that base, you can use it as a reference base to add new clients, and it just takes time to get that client concentration down, but along the way it's a risk.

And so, if a client is 25%, 30% of your business and something goes sideways with that client or you stumble, it's a pretty big revenue hole to fill, and it's not to say that you can. I think companies today will have the opportunity to do that, but it does set you back a ways to produce solid revenue performance. And I am speaking from experience. I mean Sykes went through our own challenging times in 2001 up to around 2004 migrating offshore and same thing with the dotcom.

But today, we're in a good place, that we're stable, we've got meaningful presence now in these different industries, we're not a one dimensional type of company and not only is it our delivery footprint for the US, the thing is that even though right now in Europe, we would like the margins to be better, they're certainly working towards that. We are making the investments. I'll tell you it feels good to at least have a part of a global market that we also can go and knock on doors. So I think for us, when we sit back and say where is your growth going to come from? Listen we are in; 85% of every place in the world that looks for these types of services, we are in those markets.

Not only that, but we have a delivery footprint aligned for each one of those markets that makes it to almost all of the markets addressable to us. So, provided that we can just execute and perform, and find a way to make money in those markets, right now we've got the avenue for growth, and you add on top of that the fact that many companies today are wanting to use fewer suppliers. They do look for companies. They give them more options, that if they want to grow with them in the years ahead. So again, I think that placed our favor as well. But I mean this is just talking aloud and as we look at things. But I do think that’s maybe why you hear a little bit of different tone from us, maybe then from others, and it's just some what a state of maturation, if you will, as they continue to grow and get more experience.

Bob Evans - Craig-Hallum Capital

So, as we look at 2008 and the growth you're seeing, how much of that growth is coming from, would you say existing versus new?

Chuck Sykes

Right now, I think, we're around in the 50s on the existing.

Mike Kipphut

Yeah. As of range, I would say, 50% to 60% from existing clients and about 40% from new clients. And we anticipate on that continuing in those ranges into 2008. And just to add something else to what Chuck mentioned previously, we have a pretty diversified customer base. Our largest customer is only 6% of our total revenues, and that's a Canadian customer too at that. So, once you go below that, in our top five or so, you annual report mainly looking at 5% and 4% and 3% of our total revenues.

Bob Evans - Craig-Hallum Capital

So your top five customers would account for ballpark, how much revenue?

Chuck Sykes

The numbers we gave for our top 10 were 37%. So just looking at the top five, it's about 23%.

Bob Evans - Craig-Hallum Capital

Okay. Thank you. One detail item, I missed the -- you gave a receivables number. I missed that.

Chuck Sykes

Yeah receivables are--

Bob Evans - Craig-Hallum Capital

I'll sign off and you can give that later.

Chuck Sykes

Well, okay, receivables were $145.5 million.

Bob Evans - Craig-Hallum Capital

Okay. Thank you.

Operator

Your final question will come from the line of Matt McCormack of FBR Capital Markets. Please proceed.

Matt McCormack - FBR Capital

Yeah. Hi. Good morning.

Chuck Sykes

Hi, Matt.

Matt McCormack - FBR Capital

Hi. Chuck, I wanted to kind of go back to your comments over the economy. You had mentioned that you talked to your clients, overtime and you monitored their business. You're clearly getting more volumes from your clients but what kind of confidence do you have in the volumes that your clients themselves as a whole are getting are not declining.

Chuck Sykes

Yeah. It is something, Matt, that we really do talk about. And I just, again, this is anecdotal when you just talk through them, but if you think about it, one of the things that's a little different in our business compared to the way it was is in '01 is that we're more aligned to service companies rather than product companies. And in the past when we were in the dot com time, we were very concentrated in technology. Our call volume was aligned to certain number of days after a product shipped.

So if you take PCs as an example, which was a big part of our business, say, a company gets two calls per unit shipped and then when the sales go about 90% of those calls will occur let's say in the first six months after the product has been shipped out. And in that type of environment when sales drop, well you can see your call volumes starting to drop, just for plain old customer service. But today, the majority of our business is in the service enterprise. So, even though companies today take credit cards, they may not be issuing new credit cards because they're tightening their credit requirements, but people aren't getting rid of their credit cards. And in fact, they're probably calling more because they have a lot of concerns and things that they're having to work through.

So our business isn't naturally directly related to whether or not our clients are selling more products, it's more about what's happening in the environment of servicing our clients. And so in that case, for us since the majority of the business we do is not direct marketing, so they're not cutting budgets, it's servicing we're still seeing volume. Wireless, would be the same way. I mean, people aren't getting rid of their cell phones. And to me, they still can have billing questions, they still can service outages use, same thing for broadband services.

So I think that's one of the reasons why the only company that so far we have seen in a change, I'm not going to identify the company, but it's in the area of products and it's consumer appliances. And that makes a sense to me intuitively. I mean, people aren't going out buying big ticket items in appliances, and since it's a product group, the sale volume to us, the call volume will drop off pretty quickly within 90 days or six months after that sales cycle.

Matt McCormack - FBR Capital

What would you say in terms of your revenue, what percentage is now services versus product?

Chuck Sykes

I would say today, we're probably in a range of 70%. It's a good estimate.

Matt McCormack - FBR Capital

Yeah.

Mike Kipphut

We don't have that exactly.

Chuck Sykes

I don't have that so I am estimating. But actually I'll tell you what we'll take a look at that and see if we can get that for the next call. But I think it would be it'll be a fair guess based on the size of the clients, probably not quantity of clients but in quantity of revenue, I would venture to guess 70%.

Matt McCormack - FBR Capital

Okay. And then in terms of your growth from existing clients in the third quarter that was about 40%, and it looks like that flip flopped to about, I think it was 54%. And you're now saying it's going be around 60% for '08. Is there anything that we can read into the higher growth rates of existing clients, such as benefiting from vendor consolidation or any thing like that?

Chuck Sykes

For the higher growth rate of the existing clients.

Mike Kipphut

Yeah. And that range is 50% to 60%. And I think it's due to quite a few things. Again, it's not exact science, but a lot of it is because our operating people are performing so well. We're hitting the metrics. We're doing what we said we would do and little bit more, and it's really paying off where if there is additional capacity coming out, they certainly favor Sykes as the one of their leading outsourcers. So, if either they are in-house or other competitors are taking calls, if we show the propensity to perform very well, we tend to get some of the volume increases or reallocation of volume.

We also are doing very well on the new client front, but at some point, it becomes a lot of large numbers where you increase revenues from new clients and although it may be 50%,60% last year, it tends to trickle a little bit in the succeeding year when you've had 25% growth in revenues. So it's just mathematical.

Matt McCormack - FBR Capital

Okay. And then my last question. Just going back to the US capacity obviously 1,700 basis points increase quarter-over-quarter is very strong. You have mentioned that you're expecting those current clients to be fully ramped by mid-year, and then you're going to build more capacity towards the end of the year. So what should we expect utilization to be exiting 2Q and then what is it going to be at around as you exit the year?

Mike Kipphut

Yeah. Matt, I think we provided our guidance and the numbers and I think we're just going to stick to those at this point.

Matt McCormack - FBR Capital

Okay. Fair enough. Thank you.

Chuck Sykes

Thank you.

Operator

And this concludes the Q&A session. I would turn it back over to Mr. Chuck Sykes for closing remarks.

Chuck Sykes

Thank you, Operator. I just want to thank everybody for the participation in today's call and appreciate all the questions and the interest, insights, and we look forward to speak with you guys next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a great day.

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Source: Sykes Enterprises Q4 2007 Earnings Call Transcript
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