West Corporation's (WSTC) CEO Thomas Barker on Q4 2015 Results - Earnings Call Transcript

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West Corporation (NASDAQ:WSTC) Q4 2015 Earnings Conference Call February 2, 2016 11:00 AM ET

Executives

David Pleiss - Vice President, Investor Relations

Thomas Barker - Chief Executive Officer and Chairman of the Board

Jan Madsen - Chief Financial Officer and Treasurer

Analysts

Ashish Sabadra - Deutsche Bank

David Togut - Evercore ISI

Gary Bisbee - RBC Capital Markets

Amir Rozwadowski - Barclays

Bill Warmington - Wells Fargo

Dmitry Netis - William Blair

Denny Galindo - Morgan Stanley

David Koning - Baird

Ashwin Shirvaikar - Citi Bank

Operator

Good morning, ladies and gentlemen, and welcome to West Corporation's fourth quarter 2015 earnings conference call. [Operator Instructions] I would now like to introduce you to the Vice President of Investor Relations of West Corporation, Dave Pleiss. Please go ahead.

David Pleiss

Good morning, and thank you for joining us to discuss West Corporation's fourth quarter and full year 2015 earnings and our 2016 guidance. If you have not received a copy of yesterday's press release, you can find one on our website at west.com. I am joined today by Tom Barker, our Chairman and Chief Executive Officer; and Jan Madsen, our Chief Financial Officer. They will discuss our results and our 2016 guidance. And then we'll open the call up to your questions.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Federal Securities Laws. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated or projected. Listeners to the call are advised to review the risk factors contained in our most recent Form 10-K for additional information regarding such risks, uncertainties and assumptions. The company assumes no obligation to update any forward-looking statements made during this call.

In this call, management will discuss several non-GAAP financial measures. A reconciliation of these financial measures to the most comparable GAAP financial measures can be found in the press release or on our website. We have quite a bit of information to share with you this morning and we want to keep the call to an hour, so we ask that you limit your questions to two and one follow-up. If you have additional questions, we ask that you go back into the queue.

I'd also like to remind you of our upcoming Analyst Day on February 19, in New York. If you would like to attend in person and have not received an invitation, please send me an email. We will also webcast that event and the link to the webcast will be posted to our website a few days before the event.

At this time, I'll turn the call over to Tom.

Thomas Barker

Thanks, Dave. Good morning, thank you all for joining us to discuss our results for the fourth quarter and our full year 2015. I'd like to start with an overview of our performance for the year, some of the challenges we faced and talk about our new segment reporting structure. Jan Madsen, our CFO, will then walk you through our financials in more detail. Then we'll come back to discuss our outlook for 2016.

Strong cash generation and efficient deployment continues to be a hallmark for West Corporation, and 2015 was no exception. We're pleased with how well we deployed the cash that the company generated last year and we believe the actions we took will enhance the growth profile of the company going forward.

West Corporation generated $274 million in free cash flow in 2015. We also received $275 million from the sale of our agent services business in March. We put nearly $0.5 billion to work last year. We used $259 million to pay down debt. We returned a $135 million to shareholders through stock buybacks and dividends. And we completed three acquisitions, which totaled $94 million.

The acquisitions we completed in 2014 and 2015 each have revenue growth in excess of 10% and adjusted EBITDA margins greater than the 30% we reported for the company average. I'm excited about the impact these recent deals will have on West Corporation's future. Collectively, these seven companies should add about $200 million in revenue this year.

Turning to our results for the fourth quarter and full year, I'd like to make sure we spend the time covering our results and get your questions, so I'll be relatively brief. As you know, we had some challenges last year. Certainly one of the biggest challenges was the loss of two large clients, which we have discussed in the past calls. One client was a conferencing client, the other was a telecom service client, and the impact of these two clients was $47 million in revenue last year.

Losing large customers is unusual for us. Our top 10 clients have been with us an average of over 14 years. Two of our top 10 have been with us for over 20 years. We've talked about the circumstances that led to these two clients to leave on previous calls, there's no reason to go through it again, but we remain very focused on our client retention programs and feel comfortable with the strategic relationship we have with our top clients.

Another challenge we had in 2015 related to fluctuations in foreign currency exchange rates. In 2015, FX negatively impacted our revenue by $37 million. We think the lost clients and foreign exchange problems are exceptional, and we've broken them out in the press release.

For the fourth quarter 2015, revenue was $568 million compared to $563 million for the same quarter of the previous year. For the full year 2015, revenue was $2.28 billion compared to $2.22 billion in '14, an increase of 2.8%.

Excluding the unusual items I mentioned earlier, adjusted organic revenue growth was 4.1% in the fourth quarter, 3.3% for the full year. We've provided details of our revenue growth in the press release. West Corporation continues to generate strong profitability with adjusted EBITDA margins of approximately 30% in 2015 and 7.6% growth in adjusted earnings per share.

I'm sure you've noticed a significant change to how we report our results in the press release. We're going to present our financial results in four reportable segments going forward. Many of you have asked for this level of detail and disclosure in the past, so I hope it will help investors and analysts better understand the performance of our different businesses. We've also included historical information for each quarter for 2015 and the past three full years. So this should help as you're adjusting your models.

Our largest of the new reporting segments is Unified Communications, which accounted for 64% of our revenue and 83% of our operating income last year. It's not all conferencing. This segment also includes our Unified Communications as a Service and Telecom Services as separate lines of businesses. Telecom Services provides much of the telecom network infrastructure that supports our conferencing business, so we thought it makes sense and was a natural fit within the Unified Communication segment.

Revenue in Unified Communications was down 1.6% in 2015. This decrease was driven by $47 million from the two lost clients and $37 million in foreign currency translation, combined an $84 million headwind. Excluding the unusual items, adjusted organic revenue growth in the UC segment was 3.9% in the 2015. The conferencing and collaboration business was flat on a constant currency basis in 2015.

As you know, we're the largest conferencing and collaboration provider in the world and we have been for the past seven years. Last year, we managed 167 million conference calls, an average of over 450,000 per day, 5% higher than the number of calls we managed in 2014. It's a competitive business, but we're the market leader and we've got strong economies of scale.

The three other segments are Safety Services, Interactive Services and Specialized Agent Services. Safety Services includes 9-1-1 for today's telecom companies, systems for public safety answering points, solutions for enterprises and database managements.

Interactive Services includes alerts notifications, IVR self-service, cloud contact center and professional services. There're not many companies that can match our scale and expertise in this segment. And last year, we delivered or received over 6.5 billion multi-channel massages. It's a big competitive advantage for our corporation. And third, Specialized Agent Services includes health advocacy services, revenue generation and cost management services.

Each of these segments accounted for about 12% of our revenue in 2015. On an organic basis last year, Interactive Services grew 4.3%, Specialty Agent Services grew 4.5%, and last year Safety Services was down 1.7%. Safety Services was impacted by some pricing reductions by a large client and delays in new technology rollout by client. We will spend time going a little deeper and providing more detail into these segments and their growth drivers on February 19, our Analyst Day in New York.

A year ago, we said we expected our four fastest growing businesses to grow in excess of 10% and represent approximately $970 million into 2015. These four businesses included: Unified Communications as a Service, Safety Services, Interactive Services and Specialized Agent Services.

For 2015, these four businesses generated approximately $941 million in revenue or grew 12% compared to '14. We feel good about the performance of these businesses, and expect them to contribute meaningfully to our growth and profitability going forward.

At this time, Jan Madsen, our CFO, will take you through some of the details for the year and the quarter, and then we'll come back and talk about 2016 guidance.

Jan Madsen

Thanks, Tom. Good morning. I will begin my comments with a review of our liquidity position, provide some more detail on our financial results, and then I'll turn it back over to Tom for 2016 discussion.

First, let me walk you through the major changes affecting our cash balance during the quarter. As you will recall, we ended the third quarter with cash of $182.5 million. Our fourth quarter cash flows from continuing operations were strong at a $127.5 million.

In November, we repaid the outstanding balance of our term loan B-9 with the proceeds from a $250 million B-11 term loan facility, due in November 2021. As a result of this refinancing, our maturity profile was extended with no new funded debt maturities due now until mid-2018.

Also, during the quarter, we invested $41 million in capital expenditures and returned $19 million in dividends to our shareholders. We invested another $77 million in the acquisitions of Magnetic North and ClientTell, which were funded with cash on hand. At December 31, we had a cash balance of $182.3 million, including $77.7 million in foreign cash account.

Our year-to-date cash flows from our continuing operations were $410.8 million, a slight increase over 2014. As Tom mentioned, we are pleased with how we deployed our cash in 2015, achieving a balance of allocations for future growth, debt reduction and returns to our shareholders. We invested $94 million in acquisitions and $137 million in capital expenditure, $75 million in dividends and $60 million in stock buybacks were returned to shareholders.

We also paid down over 7% of our outstanding debt or $259 million, bringing the balance down to $3.4 billion and our loan covenant leverage ratio to 4.68x. Our current debt balance consist of $1 billion of senior notes at a fixed 5.38% coupon rate maturing in 2022, and $2.4 billion of floating rate bank debt tied to LIBOR, 85% of which carries the LIBOR floor of 75 basis points.

The company is targeting a 50-50 fixed floating rate debt portfolio. Over the next quarter, we will be evaluating our options and the timeline to achieve this fixed floating mix. Our accounts receivable securitization facility and senior secured revolver were both undrawn at December 31. Our total available financing capacity is between $400 million and $430 million.

Next, in terms of our financial results, first I'll quickly touch on our discontinued operations. Income from discontinued operations, net of income taxes was $19.9 million in the fourth quarter, due primarily to a $21.6 million tax benefit associated with a higher tax basis and financial reporting basis from the divestiture of our agent-based businesses.

Moving on continuing operations, as Tom mentioned, fourth quarter revenue increased 1% to $568.4 million. Year-to-date revenue increased 2.8% to just over $2.28 billion. Our international revenue was $116.9 million in the fourth quarter and $468.2 million for the year. On a constant currency basis, our international revenue grew 0.6% in 2015.

Fourth quarter cost of services totaled $239.4 million, an increase of $5 million or 2.1%. This increase includes $1.1 million from acquisitions. We continue to carefully manage our expenses to align with our revenue growth and we're able keep our cost of services nearly flat as a percent of revenue in the quarter, as well as year-to-date.

Compared to the same quarter last year, the volume of minutes used for our reservationless conferencing services, which accounts for the maturity of our conferencing revenue, grew approximately 3.5%, while the average rate per minute for these services declined by approximately 6%.

Adjusted for the loss of a large conferencing client in 2014 and the impact of the change in foreign exchange rates, the volume of minutes used for our reservationless conferencing services were approximately 5%, while the average rate per minute for reservationless services declined by approximately 4.8%.

For the year, adjusting for the lost client and the impact of foreign currency exchange rates, the volume of minutes grew 7% and the average rate per minute declined by 8%. Despite the pricing trends in the industry, our on-demand conferencing business nearly achieved offsetting growth in minutes and remains a good business for West with strong gross margins and cash generation.

SG&A expenses for the quarter were $224.1 million, an increase of $12.3 million. Three major items contributed to the increase in SG&A. SG&A expenses from the acquisitions of SchoolReach, SharpSchool, Magnetic North and ClientTell contributed $5.9 million of the increase.

As a result of a company-wide branding initiative, we accelerated the life of several trade names, resulting in an increase in amortization expense of $1.9 million. We also incurred $1.8 million of severance in the quarter related to workforce adjustment.

Our operating income decreased $11.7 million to $105 million in the fourth quarter due to revenue mix and the higher than average margin on the lost telecom services client and the SG&A increases that I just mentioned.

Operating income adjusted for non-cash amortization of intangible assets, acquisition cost and share-based compensation was a $131 million this quarter compared to $141 million last year, a decrease of 7.2%. For the year, operating income decreased $5 million or 1.1% to $456.5 million. Operating income adjusted for non-cash amortization of intangibles, acquisition cost and share-based compensation was $551.8 million, an increase of 1.9%.

Our fourth quarter after-tax income from continuing operations increased $7.5 million to $42 million. Fourth quarter adjusted after-tax income from continuing operations was $63.7 million compared to $68.1 million, a decline of 6.5%. For the full year, our after-tax income from continuing operations increased to $190.9 million compared to $134.6 million last year.

Adjusted income from continuing operations increased 7.5% to $265.9 million. Our diluted earnings per share from continuing operations for the quarter was $0.50 compared to $0.41 for the same period last year. Adjusted diluted earnings per share for the quarter was $0.75, a decrease of 5% from prior year. For the full year adjusted diluted earnings per share was $3.11, an increase of 7.6% over 2014.

Our effective tax rate from continuing operations was 35.3% in the fourth quarter and 36.1% for the full year compared to 35.1% both in the fourth quarter and for the full year of 2014. The increase in the effective tax rate is primarily due to increases related to the mix of our income by country, accruals for uncertain tax position, and reduced federal jobs credit, partially offset by lower deferred tax on foreign unremitted earnings, resulting from our international acquisitions in 2015.

Our cash income tax paid were $18.5 million in the quarter and $108 million year-to-date. Year-to-date taxes paid are $300,000 higher than our accrual based income tax expense of $107.8 million. With another big quarter of operating cash flows and ample financing capacity, we have flexibility, and we'll continue to prioritize a balanced approach to capital allocation that includes pursuing strategic acquisitions, investing in our core businesses, reducing our outstanding debt and repurchasing shares.

At this time, I'll turn it back over to Tom.

Thomas Barker

Thanks Jan. We provided our guidance for 2016 in the press release yesterday, and I'd like to take you through some points of it now. We expect 2016 revenue to be flat to up to 3% compare to last year, and this includes approximately $25 million we expect to realize or report as acquired revenue from companies we purchased in 2015.

Additional revenue from those acquisitions were considered organic growth one year post-close. We expect foreign exchange to negatively impact revenue by $24 million, assuming the rates we disclosed in our press release. Constant currency organic growth would be 1% to 4% in 2016.

The lost conferencing client is behind us. There will not be an impact in 2016. We think the lost telecom services client will negatively impact our revenue by about $45 million this year. As we've mentioned, we had higher than company average EBITDA margins from this client, organic growth from our non-conferencing business, who will replace this revenue, but will not have the same margins.

We're working on a number of different projects to address the lost profitability, and when these take hold, we expect this could provide upside to our guidance. West Corporation has grown every year. So as you can imagine, it's difficult for us to give modest guidance like this and we think 2015 and 2016 are unusual, not indicative of the underlying strength of the company or our future.

Excluding the lost client, adjusted organic growth on a constant currency basis would be about 3% to 6% in 2016. We're expecting growth in the core businesses. The first and second quarters of 2016 will have the most difficult comps. We expect to finish the year with accelerating growth going into 2017.

We haven't given guidance by segment, but I'd like to provide some general thoughts on the growth of our segments. Overall, we expect revenue in the Unified Communications segment to be down slightly in 2016. This decrease is driven by the loss of the large telecom services client. We expect the conferencing business to be flat on a constant currency basis in '16, and we expect Unified Communications as a Service business to continue to grow in the mid-teens. It's a great business.

In Safety Services, we expect revenue to grow in the mid-single digits. We've got a strong sales pipeline for our next generation 9-1-1 services with some contracted business and we've got some newer services that we expect to ramp up in 2016. We also expect to leverage the full West Corporation sales organization to help sell our enterprise VoIP 9-1-1 solution, the company we bought 911 Enable.

We expect revenue in the Interactive Services segment to grow at around 10%. Some of this growth is due to the acquisitions of SharpSchool and ClientTell, but we expect to see stronger organic growth in this segment in 2016 than we had last year, maybe 4.5%. We've made some investments in process improvements and talent in 2015, and we expect that to pay off this year.

Specialized Agent Services should also grow in the mid-singe digits. This growth primarily comes from continued penetration in the healthcare market and some new product offerings. Cross-selling will continue to be a focus for us. About 35% of our revenue last year came from clients that used two or more of our services.

CapEx for 2016 should be between $135 million and $160 million and this compares to $136.8 million in 2015. We continue to invest in data center consolidation to improve our operations. And we recently signed a large multiyear contract that will require some capital investments on our part in 2016, but at this time we're not able to disclose the client or the segment, but we expect to be able to talk about it next quarter.

We expect West to generate a lot of cash this year. In 2015, we ended with a $182 million on our balance sheet in cash and we expect to generate between $235 million and $265 million in free cash flow this year. On top of that, we expect to receive approximately $32 million net of taxes and expenses, when we sell the real estate associated with the agent services divestiture.

So all in, we have the opportunity to deploy almost $0.5 billion in cash again this year. $0.5 billion, that's over 30% of our equity market cap, almost 15% of our debt and about 75% of last year's EBITDA. This is a company with a strong cash position.

In addition to cash we have on hand, we have almost $400 million available in our credit facilities creating a very, very strong liquidity position. And we're going to use this cash to drive growth. We're going to use this cash to decrease our leverage and continue our goal of making West a more valuable and faster growing company with acquisitions.

With nearly $0.5 billion to deploy, we're going to use approximately $75 million for our dividend. We'd like to use at least the $100 million to $150 million to pay down debt. The rest would go to acquisitions or to buyback stock. As noted in the press release, our Board recently authorized the stock repurchase program of up to $75 million.

The acquisition pipeline we have will drive some of this allocation. If we're able to find companies that meet our criteria, which is growing at about 10% with strong margins, we're going to look to add them to West Corporation. If we're able to find and acquire companies like we did last year, we wouldn't pay down as much debt or buyback as much stock, but that also means West Corporation is larger, West Corporation will be more profitable and West Corporation will be growing faster.

The opposite is also true. If we can't find the right companies to partner with, we're going to have even less debt. If we didn't do any acquisitions, if we couldn't complete any acquisitions in '16 or '17, our leverage ratio is going to be very close to about 4x EBITDA at the end of 2017.

Looking forward to '17, our telecom services client loss will be behind us. We expect conferencing and collaboration to be maybe half our revenue at the end of the year. So we're going to have half our revenue coming from businesses stable and generate a tremendous amount of free cash flow and half of our revenue is going to come from businesses with a very diverse stream of revenue, strong growth dynamics and strong profitability.

This non-conferencing portion of our revenue should be able to grow in the very high single-digits, giving West the ability or capability of achieving mid single-digit organic growth rates going forward. As always, we can enhance this growth with acquisitions, which will further accelerate our revenue growth.

West Corporation is a well-run company. It's got a team that's worked together for a long-time. It knows our clients well. We're large. We're profitable. We've got a very diverse stream of revenue with no client concentration. We generate a tremendous amount of cash and we have a lot of ways to grow this company and use that cash to grow this company.

We've got a strong track record of acquiring companies and making them faster growing and more profitable as our partners. And we have a very compelling dividend yield right now. A year from now, at the end of this year, I look forward that West Corporation having less debt, less floating debt to protect against rising rates, and improving growth profile. I am excited about the opportunities we have for our company going forward.

At this time, we can open up for questions that relate to our 2015 performance and our guidance for 2016.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Ashish Sabadra with Deutsche Bank.

Ashish Sabadra

Tom, thanks for providing these details, I think the increase level of transparency is definitely very helpful to better understand the key drivers in the business. Just going back on the revenue growth side, what gives you, like the Safety Services you talked about, some headwinds in the quarter and guided to mid-single digit? I just wanted to understand the puts and takes there? What gives you that confidence or the ability to go from a decline to a mid-single-digit growth in '16?

Thomas Barker

There are a number of things, Ashish. That's a really good question. We have an extraordinarily strong position in that market. And that's a market that's undergoing some change, where new technology helps us save people's lives. There were some sales and installations that we expected in 2015, they got put-off. So we know they're going to happen in 2016.

The new services and enhancements that we've launched are being very well received. We had some re-pricing of a client that we expect to have behind us. So we've got a lot of confidence in that business. That's a team that knows that business well, has a great orientation for working for the public safety, working for the public good, and a high-degree of confidence in the technology and enhancements that are rolling out in 2016.

I mean, you know us. We're pretty conservative with our guidance. We wouldn't put out a number unless we had a lot of faith in it. And they had an unusual year last year, but I think they're going to be strong this year, new products, new services, strong market position.

Ashish Sabadra

Quickly on the margin side, when we look at the margins outside of the Unified Communication, especially in the fourth quarter, we saw some margin pressure in Safety, Interactive and Specialized Agent. Can you just talk about how should we think about the margins going forward? What were some of the headwinds to margins in this quarter and how should we think about margins on a more normalized basis?

Thomas Barker

I mean, I think we did have a little bit of margin compression. Jan will walk you through it. But the underlying story is even with that, this is a really profitable company, doesn't use a lot of cash to grow, threw off a lot of cash in the fourth quarter. But Jan do you want to kind of address some of those issue?

Jan Madsen

So I had mentioned that we had some severance in fourth quarter, and so you're seeing that hit in Safety Services and Specialized Agent Services. Also with our one West branding initiative, the relifing of our trade name, so the increased amortization expense is showing up in Safety Services numbers in the quarter.

Compared to the third quarter, there is a little bit of noise in the margins because of the accounting related to the mark-to-market adjustment on our Non-Qualified Retirement Plan, and so there is a big swing in the value quarter-to-quarter. On a full year basis, it's not really material, but it does kind of create a little bit of fluctuation. And as Tom said, as we look into 2016, I do expect that the margins to be better than the full year 2015 margin.

Ashish Sabadra

And maybe just a quick a follow-up on that margin question. I understand the loss of the client, which was higher margin is weighing on the margins in '16, but is that a way to think about excluding that client loss? How should we think about the margins, with the margins would have been flat, expanding or could we see pressure on the margins excluding the client loss, so that we can think about the normalized margin profile for the business?

Thomas Barker

Well, at a high-level, I think we want to talk about the growth of the margin. And this client loss is big, it's really profitable. And as you can imagine, getting up from underneath the infrastructure and expense related to that high margin client, really, really impacts us. I mean, it almost took a full year's EBITDA growth away from this company.

And we're not going to report quarter-by-quarter what we would look like with and without that client, but it's caused us to pull together as a group, think about how else we can run this company more profitably, and we're using that as a catalyst as we accelerate our growth to increase our profitability. So it's not something I like going through, but we're going to come out of this as a better company.

Operator

Your next question comes from the line of David Togut with Evercore ISI.

David Togut

Tom, could you address the broader investor concern about disintermediation in your core business, particularly given the two large client losses in the past year and why do you think this won't reoccur in '16 and '17?

Thomas Barker

I think I would take exception to your term of how you characterize these client losses. These are not interruptions in growing these businesses. These are two clients that left for pretty specific reasons. We don't have two other clients like them, so to come up with two clients that could be of this size and leave us is unusual. It's really unusual that we had them back to back. We've been building this company every year since 1986, so 30 years worth of steady growth.

These two client losses came at a particularly troubling time, but there is never a good time for a client of this size to leave you, but when I think about the long-term trends that are propelling West Corporation, conferencing stable, but with more minutes being used every year.

West IP growing very aggressively with some of the best margins of any company in that business, a large and growing healthcare services practice, one of the largest IVR notification and alerts companies in the country, really, really strong, profitable specialization agent services with nice growth and strong profitability skills, and an enviable position in public safety that we expect to build on and grow on.

So this is a company with a lot of big trends driving its growth. I don't worry about this mediation for impacting our growth. A big challenge is trying to figure out where do we put the capital, where are we going to grow and what do we use with the cash that we throw off?

We've got a number of drivers contributing to our growth. We've got really strong cash flow. I hate that we had these client losses. I can't point it to other companies that have that kind of size or concentration or profitability in conferencing or telecom services, so I don't expect those to happen again, and I do expect West Corporation to be in a growth track.

You look at this company at the end of 2016, its maybe half conferencing and half other. And the other is profitable and growing fast. So what's held us back I think for the last couple of years has been organic growth.

We're on a much more stable path to continued sustained organic growth with really good margins. And if we use that cash to pay down debt and we use that cash to drive other acquisitions to us, and we use that cash for dividends, and we use that cash for acquisitions, this company can't help, but become bigger and more profitable.

David Togut

The average rate for reservationless minute fell twice as fast as the growth in minutes, if you include the client loss. My question is are you taking steps to reduce your unit cost structure to anticipate potential continued negative trends in terms of unit price and reservationless minutes?

Thomas Barker

Yes, we are. That's one of the reason why Telecom Services has been bundled with Unified Communications. That company gives us the ability to manage our highest variable cost in that business, which is variable telco. We think we've got the best cost structure if anybody in that business, and I think that's borne out by our ability to take market share.

David Togut

One follow-up. What was the interest rate on the $250 million term loan due July 2016 that you just retired?

Jan Madsen

LIBOR plus $275 million.

Operator

Your next question comes from the line of Gary Bisbee with RBC Capital Markets.

Gary Bisbee

I'd like to go back to the margin question earlier, and a lot of your answer about the margin pressure in 2016 revolves around this lost client and the high profitability. But if you look at the full year you just reported, it is interesting that despite two client losses and weak growth in conferencing, margin was actually up for the year and Unified Communications in it was down sharply everywhere else.

So can you help us think about 2016, what the right expectation for margin at the segment level is? Is Unified likely to be down, as you get bulk of this client loss? And how do we think about the others? What are the reasons those are down? Could they actually rise?

Thomas Barker

I think one of the big things, Gary, it makes a good point, is particularly in the fourth quarter it has to do with some of the investments we made in 2015 that we think are really going to help us in 2016. Interactive Services is a really good example. This is the business we believe in, this is the business that requires continued investment in technology and capital.

We made those changes. There's some really nice wins. I'd like to be in a position to announce in 2016. We don't have permissions from these large worldwide clients yet, but this is an example of where do we invest to make sure we've got a strong multiyear path to growth and profitability. And as you can imagine, this is a very conservative guidance. I don't want to miss our numbers and I think 2015 is a good example.

As a corporation, we're going to represent strong return on invested capital. We're going to run Unified Communications as profitably as we possibly can. We're the largest and most profitable business in that segment. I don't expect that to change. And we're going to run this company for continuing organic growth expansion and really stable margin. So it's a relatively cautious look for the year and we're going to try to do better.

Gary Bisbee

I appreciate that commentary, but I don't think you really answered the question. So Unified down I think with the client loss, is that a good assumption? And what about the other three segments? Is there continued investment such they'll be down again flat, up?

Thomas Barker

No. Gary, you've got our guidance for the year, we're not providing it on a quarter-by-quarter basis. We will report every quarter how they do. You can't have the implied guidance that we have without some stability in margin and growth. And I think these businesses are going to perform well in 2016.

Gary Bisbee

And then just a follow-up, a couple of quick points on it. You mentioned getting the 50-50 split of fixed and variable debt. Does the guidance include higher interest expense from locking that in? Does the guidance include the $150 million of buybacks and M&A, how about tax rate, any of those smaller details?

Jan Madsen

No, the guidance does not include any of that. But we kind of think the combination of stock buyback and other things can offset any expenses related to that, plus interest savings on paying down debt. So we're comfortable with the guidance and not being impacted by any adjustments we make on the fixed floating.

Operator

Your next question comes from the line of Amir Rozwadowski with Barclays.

Amir Rozwadowski

Very much appreciate the color on sort of how you're thinking about priorities in terms of your cash utilization. The first question I had was how should we think about the pipeline from potential acquisitions out there? I mean, you folks have had a history of finding unique acquisitions and being able to drive accretive transactions through the course for the company's history. And would love to hear sort of a thought process around the type of pipeline and what you're seeing from that perspective?

Thomas Barker

We don't comment on who we're talking to or how many opportunities we have, but I think 2015 is really illustrative for West. We highlight what a good acquisition is for us. That's something is going to grow at twice our consolidated rate. It's a company that's going to be profitable and not dilute our profitability and maybe become more profitable as part of West. And we'd like to add to businesses that we're already in.

So when I take a look at the acquisitions we had in 2014 and 2015, they are in notification alerts, they are in public safety, they are in specialization agent services, so they are in businesses that we're already in. They can help us and Unified Communications, and can help us expand our offering. We give them distribution, we can give them access to clients that they wouldn't normally have, they give us additional products and services to sell. I think about how we can enhance our positioning in a K to 12 notification market with the acquisitions.

I am really excited about what Magnetic North can do to help our Unified Communications as a Services business with host to contact center. So these are businesses that can grow faster, because they're part of West. These are businesses where West feels the benefit of nice margin and increased chances to grow our topline. So that's what I would like to be able to complete in 2016.

I would be thrilled if I can use all of our available cash to drive new acquisitions similar to what we had in 2015. These are really good companies, really good management teams, bolt on really well to the companies where we're already in that space and I'd like to find more of that.

But there has been times we've gone up to a year, year-and-a-half, but we couldn't find the right fit and we're not going to force it. I mean, if we can't find the right company to partner with, we've got plenty of other uses for that cash. We can reduce our debt; we can buyback our stock, both of which will increase earnings per share. But if we have a little bit of luck, we can put that cash to work and West Corporation should be larger, faster growing and more profitable, if we can find the companies to partner with.

Amir Rozwadowski

And then, if I may, a follow-up. I mean it seems as though when we're talking about some of the recent customer churn that you had mentioned, that you feel comfortable that there isn't as much risk with potential future customer churn given the size and scope of the impact of what we've seen.

And then I recognize that those are just really unique in terms of their former contribution to you folks and so forth, but how should we think about the incremental risk of your potentially smaller customer churn, I guess the concern has been that there could be additional churn issues going forward. And at least a sense from the prepared commentary and some of the other questions that you're giving us, there is less of a risk along those lines, so I just wanted to make sure that that's the right sort of messaging?

Thomas Barker

You're right and that's the message. And we're puzzled that the valuation reflects, I guess people think that we're going to continue to lose clients like this. We don't have a lot of clients like this. Our track record is not one of losing clients like this. I think the exception points out the rule that our large clients generally stay with us and do more with us.

We had a couple of unique situations. I don't expect them to be repeated, I do expect us to expand the relationships we have with our large clients, I expect to do more with them and I expect to add additional services as West stay even closer to these clients. I can't point to two other clients that have the same profile as those last two.

And I think the other thing that's important to understand is that large conferencing client, we've been talking about now, this is the eighth quarter, I think that says not just that we lost them, but it was difficult for them to just leave us. What we do is important for our clients. They need us and we need them. And it's a good strong partnership. I mean $2.3 billion with the revenue. There is going to be some churn. But overall, if you look at what we've done day in and day out, 30 years; let's grow this company that means we keep our clients.

Operator

Your next question comes from the line of Bill Warmington with Wells Fargo.

Bill Warmington

So I also want to say, I appreciate the transparency on the segments and the capital allocation, and also congrats on the minute volume and average rate spread finally turning positive on an adjusted basis. So the first question I have for you was, I do want to make sure I understood when the $45 million EBITDA impact from the telecom client, in which quarter do we see the last of that in 2016?

Thomas Barker

Probably in last quarter.

Bill Warmington

So fourth quarter 2016. So that will run through the whole year?

Thomas Barker

It will run through the first three quarters of this year, in fourth quarter the comp should clean up.

Bill Warmington

And then, in terms of the volatility in the capital markets, has that been impacting the volume of deals that you've been looking at on the M&A side? And has it impacted the pricing?

Thomas Barker

No. Now, these are generally smaller private companies that don't have access to the capital markets, Bill.

Bill Warmington

And then the last question then, I wanted to ask about the -- if you could talk about the seasonality by segment for the new segments? I know there is a lot there going on in terms of client losses, acquisitions and FX, but how much of a role is seasonality, as we go to model that going forward?

Thomas Barker

I think, almost none. There is some that may have a little extra or less, but pretty balanced in the fourth quarter of the year, but this is not a company that's rally driven by seasonal trends, Bill.

Operator

Your next question comes from the line of Dmitry Netis with William Blair.

Dmitry Netis

A quick follow-up on the margin side. The question has been asked, but I want to focus more on the operating margin. And Jan, to you comment of a high EBITDA, sort of margin customer going away, was that the result of that 27.1% Q3 operating margin in the Unified Communication business going down to 24.4%. Is that primarily the result of that?

Jan Madsen

That's right, Dmitry, that would be the main driver there.

Dmitry Netis

Did I hear you say that 4.16% in the Unified Communications, do you expect the margins on the whole to rise operating margins?

Jan Madsen

No.

Dmitry Netis

If you could maybe provide sort of your thought process around the operating margins in each of the four segments as we go into the '16 timeframe? Are they're directionally up, flat, down?

Thomas Barker

I mean I thought I tried to answer this before. We're not giving guidance by profitability, by segment, by quarter. We will report every quarter our segments and show you how they did, but that's -- I mean, we specifically said, we're not doing that.

Dmitry Netis

We'll make our own assumptions then provided the commentary on the health and other business and the splits. Very well. And then, I guess some more on a high level side of things. As you, again, focusing more on the conferencing and collaboration side, Tom, if you could just talk maybe about the competitive dynamic?

And just maybe asking the question sort of differently, as far as some of the acquisitions didn't happen in the last year with some of your competitors going away either in a private domain or got picked up by a larger enterprises. And then the entry of Microsoft Lync kind of co-opting the whole segment from the [technical difficulty] web conferencing point of view, how does that impact, are the competitors going away helping, not helping you, what's the effect of that on your business?

Thomas Barker

I'll try to be brief. We just have a few more minutes to wrap up this call. One, I do take a little exception, I wouldn't say, Microsoft is co-opting this whole business. They've got a product out there. I expect them to gain some traction with it. But conferencing is a business which is widely used, and as the price goes down people seem to use it more as borne out by minute growth.

I think the big story with Premiere Global's private transaction is that it was worth a $1 billion. West Corporation is larger, our conferencing business is larger. Our conferencing business is more profitable. Our conferencing business is growing faster. So by any metric that you want to use I think our conferencing business is worth substantially more than $1 billion.

And you'd look at that relative to our market cap and you wonder, why don't people understand that. This is the business that throws off a lot of cash, it's widely use. We take market share every year. We're seen as a leader and a global leader in this market. And we expect to do a lot with that.

Secondly, I'm really proud of Scott Etzler and his team and what they have done with that field sales force, converting it not just from a line of business of conferencing, but using those relationships to drive additional transactions and wins in Unified Communication as a Service is a huge advantage for us. That means we get to keep our field sales force in place. When our competitors are reducing the number of people they've got selling, their product and services, we've come up with the way to continue to pay for our field sales force.

So it means, we're going to continue to take market share, we're going to continue to drive margin and profitability in conferencing and we're going to continue to drive growth in Unified Communication as a Service, largely as a result of our product, our services, our capabilities and the field sales force we have in conferencing.

Operator

Your next question will come from the line of Denny Galindo with Morgan Stanley.

Denny Galindo

I'll make it quick here. I had some questions on margins, but maybe I'll save that for the Investor Day. I did want to touch on kind of the cyclicality of the business, and any commentary you can give about the different segments specifically? And that you see, how would you expect minutes and rate to perform in a recession? And then, how do you expect the other businesses to hold up in recession? Which ones are more stable, less stable? Any commentary on that would be helpful. It's certainly become a hotter topic this year.

Thomas Barker

We're business-to-business services companies, so we need a good business environment. You've got our best estimates, given our view of the year coming up. The big advantage we have is diversity of revenues, so not a lot of cyclicality. I don't expect the first and fourth quarter to be driven by a lot of change in the operating environment.

Maybe we get some expansion towards the end of the year, because of some of our growth and cost management initiatives that will help our profitability and help our growth profile. But there is not a calendar driven event. And I expect a relatively stable operating environments and our forecast is predicated on that for the year.

Denny Galindo

Any thoughts on, just if we did go under recession, how much that would impact some of the various segments, or you say, [multiple speakers].

Thomas Barker

I have seen conferencing be impacted by a recession that's B2B service, so we need people at work talking and collaborating. Public safety is generally not impacted. I don't think our Specialized Agent Services is a B2B service and healthcare oriented service. So that should have a pretty good year.

The value proposition for that Interactive Services and notification alerts is really strong, so I don't expect a lot of negativity there. And Unified Communication as a Service, look at the growth rate, they're on fire. They are growing really, really aggressively. So we're going to have a good year.

Operator

Your next question comes from the line of David Koning with Baird.

David Koning

And I guess, when we look over just the last eight years, growth has kind of been between negative 2% and plus 2% and kind of an organic constant currency growth each year, so very stable, which is good to see, but also just not growing that fast. And that's through a cycle, so some good economic years, some bad years. And it seems like there is a lot of optimism that things are going to get better.

When I think of it, it could be one of few things, it could be either you have optimism, the economy is going to get better; I'm guessing that's not necessarily one, but maybe just the better mix of business. And maybe that were at a better point in somebody's industries, then you maybe thought we were at different points. Maybe you can just comment, is it really a better mix of business that takes you away from kind of the last eight years or maybe how are we diverging here?

Thomas Barker

I think you kind of answered your own question. You point to an eight-year period, which was the worst economic environment that I've worked through. So I think that's behind us. Second is, we divested an agent-based business, where you could have growth and revenue and very little growth and profit, that business was characterized by the guy with the most capacity, willing to work for the lowest margins, setting the price point for an industry that doesn't impact us any more.

Third, we have a different mix now. We're a platform-based company, margins are good, we can invest differently in our people and our technology, where economies of scale matter. You look at the agent-based businesses, just when they went from $300 million to $1 billion to $2 billion, they didn't get more profitable. That's a different dynamic for West going forward.

David Koning

It is interesting to see, it seems like you're in one of the best places you've been in the last eight to 10 years now, maybe your valuations at one of the cheaper point.

Thomas Barker

Yes, you are right. I walk the halls, I make trips to go see clients with our sales people, there is a lot of enthusiasm for what we can do. It hasn't translated to a share price yet.

Operator

Our final question will come from the line of Ashwin Shirvaikar with Citi Bank.

Ashwin Shirvaikar

So a couple of questions. One is, and just looking at the CapEx, seems to be a reasonably wide range from flat with 2015 to up 20%. Can you walk us through what sort of investments are going into the CapEx line?

Thomas Barker

Yes, given a relatively low-growth year, I would expect CapEx not to grow. And so I think we are in the mid-130s in '15. I would expect that for '16 also. But we've got two other initiatives that we're going to use our capital to drive additional growth.

One of them has to do with a client. We've signed a contract. We are not allowed to talk about it yet. So that's going to require some CapEx. And I'm reluctant to even highlight the segment at this point that it impacts. But that's the big part of it.

And the other is the finishing of our data center consolidation. This is a multiyear plan. We talked about it a couple of years ago. It should drive efficiencies. It should make us more reliable. It does address no security risks. We think that's the right investment to make.

Ashwin Shirvaikar

And just going back to the Unified Communication as a Service that obviously is growing fast. But as I kind of look at the broader segment, is that growth coming at the expense of other traditional stuff that might be done in that segment? In other words, are you kind of cannibalizing yourself?

Thomas Barker

No. These are expanded relationships with existing clients and new relationships. This is a business -- and Gartner does a nice job talking about how there is a lot of momentum in this space. As companies realize, they don't need the PBX, they don't need the IT staff. They can have access to cutting-edge services and technology and reliability without the CapEx, turning into a variable cost and not supporting that infrastructure themselves.

And we positioned ourselves as a company, playing primarily in the mid-market, where we can have a broad offering, full portfolio of services and take advantage of many of the relationships we have. So this is not cannibalization play at all. This is additive to West. And companies and our peers' net space have really attractive valuations. So we think it's just a matter of time, before the world wakes up and realizes, we're a big player in that market and we deserve the recognition for having that kind of a product offering.

Ashwin Shirvaikar

Does that then lead to sort of a thought process that says, there are parts of that Unified Communication portfolio that maybe should be divested, because they are lower growth or maybe less stuff that clients want less of going forward? Is that [multiple speakers]?

Thomas Barker

Well, I know we've got to wrap it up. But it's not that client wants less of it. I mean, in conferencing, it throws off a lot of cash, has a wonderful position in the marketplace. And our clients are actually using more of it. Look at our minutes, this is a business services company that is well-respected and that our clients use.

And on top of that, we've been able to layer on additional services, streaming, global conferencing, web conferencing and expanding those relationships from conferencing to collaboration to Unified Communications as a Service. This is kind of textbook West Corporation, get close to clients, listen to them, figure out what other problems they have, come up with a service and a solution that's high quality, that's profitable in scale, then they'll partner with us and that's what we're doing.

Operator

I'll now hand the conference back over to management for any concluding remarks.

End of Q&A

Thomas Barker

Well, I appreciate the support. Those were a lot of really good questions. I look forward to seeing you all in person in New York in a few weeks, I believe February 18. We're going to try to provide additional color on some of our businesses. And Jan and I look forward to seeing you there.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining. You may now disconnect.

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