Sykes Enterprises, Incorporated (NASDAQ:SYKE) Q3 2017 Earnings Conference Call November 7, 2017 10:00 AM ET
Chuck Sykes - President & CEO
John Chapman - CFO
Vincent Colicchio - Barrington Research
Bill Johnson - Wells Fargo
Joan Tong - Sidoti & Co.
Dave Koning - Baird
Good morning, and welcome to the Sykes Enterprises Incorporated Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instruction]
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 are based on the beliefs of management as well as assumptions made by and information currently available to management. Phrases such as our goal, we anticipate, we expect and similar expressions as they relate to the company are intended to identify forward-looking statements.
It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and the company's Form 10-K and other filings with the SEC from time-to-time. Please note this event excuse me.
I'd now like to turn the conference over to Mr. Chuck Sykes, President and Chief Executive Officer. Please go ahead.
Thank you, Andrew and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises third quarter 2017 financial results. Joining me on the call today are John Chapman, our Chief Financial Officer; and Subhaash Kumar, our Head of Investor Relations.
Let me provide a quick summary of our financial results for the quarter. Overall the results were encouraging across the Board relative to expectation. Currently the areas of strength in terms of demand continue to be the financial services, technology, transportation and other verticals.
Specifically, business volumes around fraud, credit cards, retail banking, leisure travel, retail and complex network support continued to provide a nice tailwind for growth. And while the communications vertical, which is our largest vertical remained under significant pressure from headwinds around pricing and court cutting, we were able to grow overall due to the breadth of our client portfolio, vertical markets and geographic mix of our business.
Turning to operating margins in the quarter, they came in substantially better than what was implied in our guidance. This is despite low levels of overall capacity utilization rates and investments in the EMEA reason. We attribute the strong execution, particularly to our non-U.S. delivery platform, which offset underperformance in parts of the United States.
And finally, we delivered solid cash flow generation, which sustains our healthy balance sheet, giving us the flexibility to reinvest in our business, make opportunistic acquisitions and return capital to shareholders.
As we closed out the year, we continue to see growth opportunities in the marketplace. While there will likely be some fluctuations in the mix of growth drivers, both in terms of geography and verticals as third quarter results demonstrate, we believe our long-term revenue growth target averaging 4% to 6% is sustainable.
At the same time, we remain steadfastly focused on various action plans that simplify, streamline, centralize and consolidate aspects of our customer care operations in the U.S. in order to restore the margin potential of our overall business and we are making progress.
Based on the trend of various operating metrics, it is our view that the headwinds to the U.S. operations is starting to moderate and we believe further time over target should yield improvements as we head into next year.
So before I hand the call over to John, I'd like to in my prepared remarks with a quick take on the state of the customer contact management landscape and how we are adapting to it, the forces of technology, shifting consumer habits and changing demographics are upending wholesale industries and business models, whether it is media, automotive, retail or consumer services to just name a few industries, the stories follow what seemly looks like a standard script, where a new app or technology emerges on to the scene and drives demand fragmentation, which creates more competition for incumbent industries, leading to revenue pressure and higher costs in the short term as investment is needed for the incumbent to counter those impacts.
As we see this play out across the broader economic landscape, it is forcing clients in various industries to look at each business process more strategically, including customer contact management support. These clients want their strategic partners to bring the latest tools and processes that enrich and streamline each aspect of the customer lifecycle in this rapidly evolving world.
With the interplay of these forces, combined with the necessity to stay ahead of the curve, we continue to reinvest in our service offerings through both organic and inorganic means. Broadly speaking, the focus of our reinvestment remains differentiating and strengthening the core business.
Specifically, one component of our reinvestment remains optimizing the human capital processes and cost internally, by leveraging artificial intelligence and rich datasets to enhance the age and experience, drive agent performance and generate greater end-user satisfaction.
We have an internally developed platform called OneSYKES, which we have started to roll out that can help us achieve this goal. We are also making targeted investments in areas that address the revenue side of the equation.
The Clearlink acquisition was just one example of that last year and we've recently made a couple of smaller strategic investments including an equity investment in XSELL Technologies. Given the increasing complexity of customer care transactions, coupled with the trend toward embedding sales in those transactions, our investment in the XSELL platform leverages machine learning and artificial intelligence algorithms to enhance the agent work experience, thereby driving higher sales throughput from agents and higher value per transaction for our clients. This platform can potentially de lever across our client portfolio, markets and global delivery footprint.
And finally, we are looking for ways to extend Clearlink's competitive advantage in related industries that are undergoing digital dislocation. The acquisition of Portent illustrates that point. In the case of Portent, this acquisition leverages Clearlink's strength and performance marketing to capitalize on the disruption in the traditional advertising agency model, which is being fueled by the rise of digital marketing.
With Portent, Clearlink builds on its proven agency platform creating opportunities for our suite of offerings around performance marketing and traditional customer care. In sum, we are encouraged by our better than expected third quarter results. The silver lining is that the headline to our U.S. operations is moderate, but there still remains a lot of work ahead and we understand the challenges and are taking the right actions to turn around our U.S. operations while reinvesting in our business that will sustain our revenue growth trajectory and support our operating margin expansion goals.
And with that, I'd like to hand the call over to John Chapman. John?
Thank you, Chuck and good morning, everyone. On today's call I'll focus my comments on third quarter results, particularly key P&L cash flow and balance sheet highlights after which I will come to the business outlook for the fourth quarter and new year 2017.
From a revenue perspective we came in at $407.3 million for the third quarter of 2017. Relative to the third quarter business outlook revenue range of $397 million to $402 million, the $7.3 million increase relative to the midpoint was split roughly in half between higher demand and favorable exchange rates.
On a year-over-year comparable basis, revenues were up 5.6% on a reported basis, yet up yet up 5.2% on a constant currency basis. By vertical market on a constant currency basis, financial services were up around 34%, technology up 11%, the other ventricle which includes retail was up 11% and transportation and leisure up 5%, more than offsetting the healthcare and communications vertical, which were down 16% and 13% respectively.
Third quarter 2017 operating margin decreased to 6.4% from 7.7% for the comparable period last year. Third quarter 2017 operating margin includes an impairment charge of $700,000 or 20 basis points, relative to facility rationalization for our third quarter 2016 operating margin reflected approximately 70 basis points of favorable adjustment related to contingent consideration adjustments associated largely with the acquisition of Qelp.
The decline in operating margin on a comparable basis was due to sub optimized revenues from the acquired customer engagement assets in the second quarter of 2017 and ongoing operational inefficiencies around recruitment and retention in the U.S.
On a non-GAAP basis, third quarter 2017 operating margin was 8.2%, versus 8.5% in the same period last year due to the aforementioned factors. Third quarter 2017 diluted earnings per share were $0.52 versus $0.50 in the comparable quarter last year, with the delta due principally to a lower tax rate on a comparable basis.
On a non-GAAP basis, third quarter 2017 diluted earnings per share were $0.62 versus $0.55 in the same period last year. Third quarter 2017 diluted and per share were higher relative to the company's August 2017 business outlook range of $0.42 to $0.45.
Roughly half of the $0.19 outperformance relative to the midpoint of the business outlook were operational in nature. The remainder was mostly due to lower incentive compensation, resulting from a delta between annual and long-term financial targets and the actual and projected performance relative to those targets, couple with the contribution from a lower tax rate.
Coming to our client mix for a moment, we continue to hobble in the 1% to 10% plus client, our largest client AT&T which represents various contracts including the demand generation business from Clearlink represented 13.9% of revenues in the third quarter of 2017 versus 17.1% in the year ago period, driven by lower demand and operational inefficiencies.
Our second largest client, which is in the financial services vertical, represented 7% of revenues in the third quarter of 2017 an increase versus 5.9% from the year ago period, due to higher demand. On a consolidated basis, our top 10 clients represented approximately 48% of total revenues during the third quarter than a couple of percentage points from a year ago period, due largely to declining revenues from our largest client.
Now let me turn to select cash flow and balance sheet items. Net cost provided by operating activities in the third quarter was up 21% to $46.8 million versus $38.7 million with the change due mostly to working capital swing factors.
During the quarter, capital expenditures were $12.6 million or 3.1% of revenues versus 6.5% of revenues in the year ago period. Our balance sheet at 30 September, 2017 remained strong with cash and cash equivalent of $328.3 million of which approximately 90% or $295.5 million were held in international operations.
At the end of the quarter, we had $267 million in borrowings outstanding with $173 million available under our $440 million credit facility. We continue to hedge some of our foreign exchange exposure. For the fourth quarter we hedged approximately 53% on a weighted average rate of 50.82 Filipino peso to the U.S. dollar.
In addition to our Costa Rico Colon exposure for the fourth quarter is hedged approximately 63% on a weighted average rate of 564.73 colon to the U.S. dollars. Receivable were at $342.6 million, trade DSOs a consolidated basis for the third quarter were 74 days, unchanged sequentially and comparably.
DSO was split 72 days for the Americas and 86 days from EMEA. Depreciation and amortization totaled $19.5 million for the third quarter.
Now I would like to review some seat count and capacity utilization metrics. On a consolidated basis, we ended third quarter with approximately 52,400 seats, up roughly 5,000 seats comparably and up 1,000 seats sequentially.
Included in the comparable third quarter increase in seat count, our 2,900 seats associated with the acquisition of the customer engagement assets of our global 2000 telecommunications service provider. Even excluding the acquisition, the comparable seat count increase reflecting capacity additions mostly outside the U.S.
The third quarter seat count can be further broken down to 45,200 new Americas region and 7,200 in the EMEA region. Capacity ligation rate for the end of the third quarter of 2017 was 70% for the Americas and 80% for the EMEA versus 75% for the Americas and 78% for EMEA in the year ago quarter.
The decrease in the Americas utilization was driven by capacity additions related to the aforementioned acquisition as well capacity additions owning to higher projected demand and the related operational inefficiencies. Capacity utilization rate on a combined basis was 71% versus 75% in the period a year ago with the decline mainly due to the stated factors.
Now I would like to turn to business outlook. We are raising our full-year 2017 revenue and diluted earnings per share outlook reflecting the above expectations operating results in the third quarter of 2017. Meanwhile we continue to work various actions plans to address operational inefficiencies around staffing, attrition and capacity utilization and believe the drag from them on an underlying operating results is starting to moderate.
Our revenues and earnings per share assumptions for the fourth quarter and full year are based on foreign exchange rate as of October 2017. Therefore, the continued volatility in foreign exchange rates between the U.S. dollar and the functional currents of the markets we serve could have a further impact positive or negative on revenues and both GAAP and non-GAAP earnings-per-share relative to business outlook for the fourth quarter and full year.
We anticipate total other net interest expense of approximately $1.8 million for the fourth quarter and $5.3 million for the full year. The amounts in other interest income expense however exclude the potential impact of any future foreign exchange gains or losses.
We expect a slight reduction in the full year 2017 effective tax rate relative to the outlook provided previously on August 8 with the decline due to various discrete items including settlement of uncertain tax positions, an increase in tax credits coupled with a release of a valuation allowance and a shift in the geographic mix of earnings to lower tax rate jurisdictions.
Considering the above factors, we anticipate the following financial results for the three months ending 31 December. Revenues in the range of $407 million to $412 million. Effective tax rate of approximately 29% on a non-GAAP basis and effective tax rate of approximately 31% to a diluted share count of approximately $42.2 million, diluted earnings per share of approximately $0.30 to $0.32, non-GAAP diluted earnings per share in the range of $0.39 to $0.41, capital expenditures in the range of $14 million to $17 million.
And for the 12 months ending 31 December, we anticipate the following financial results. Revenues in the range of $1.574 billion $1.579 billion, effective tax rate of approximately 20% on a non-GAAP basis and effective tax rate of approximately 25%, fully diluted share count of approximately $42.1 million, diluted earnings per share of approximately $1.46 to $1.49, non-GAAP diluted earnings per share in the range of $1.91 to $1.94 and capital expenditures in the range of $62 million to $65 million.
With that, I'd like to open the call up for questions. Andrew?
We will now begin the question-and-answer session. [Operator instructions] The first question comes from Vincent Colicchio of Barrington Research. Please go ahead.
Yeah. Thanks for taking my question guys. So, in terms of improving the domestic business, beside from capacity utilization metrics should we look out to gauge your progress there?
Yeah Vince, this is Chuck. The things from your perspective where you guys are, the thing that you would be focused on is within the Americas. You'll see the MOI, the operating margin as we segment out on that they start moving significantly with it.
The other is on the capacity utilization, but the four pathways that we're following internally, which really isn't that visible to you guys in your role is first, we just have some operational things that we're trying to implement, I hope this address the labor challenges that we're experiencing in U.S., which is primarily through attrition and absenteeism, stop to just recruiting on the demand that we have given what the labor market now.
I know you guys don't get to see that very much, but that would ultimately manifest itself on our gross margins. The other thing is that we are having to go back and sit down with our clients for which we built a lot of these new centers little over 2.5 years ago and see if we get them to realize the changes that have taken place in the marketplace and so get the pricing. That too would manifests itself over into gross margin.
The capacity piece is the one that we do report on, this is John was just given you guys and as you tell, I've always given that rule of thumb, now at 70% going to 80% you would probably see about 1.5 of margin improvement, that of course increases at a decreasing rate, but that's a big lever that we want to get to.
And then once we go through them we're rationalizing the capacity and we get to our new normal of just seeing where we are and then we'll be rightsizing the G&A that's non-sight related. So, it's not things necessarily that you see externally in the metrics, but I think you would see G&A as a percent of revenues starting to get more in line than of course that be the MOI and you see the gross margins and you would see the capacity metrics starting to move. That would be the metrics that I think you would be able to see if it's making a difference.
Okay. Thanks for that. And then it looks like you're getting good traction in communications in Europe or in EMEA. Just my understanding is that's pretty competitive vertical overseas. Am wondering will you get average company margins in EMEA for that what type business?
Yeah, the telco vertical, it is an interesting one and you're correct in saying it. It is a demanding environment, but I think we're all the where to. It is still the largest segment within our industry and the particular challenge within the communications vertical right now really is derived from when we have domestic-based delivery and that's pretty much everywhere in the world.
So, if we were serving the communications industry in Germany, from Germany it is a challenging environment and unfortunately, we're learning that now within the U.S. given away the labor market has shifted on us right at the time that a couple years ago, we added capacity for that vertical.
So, the way we want to respond to it, we're not exiting if you will that vertical. In fact, if we're going to remain at the size we are and continue to build on this foundation, we got to find ways to succeed. We believe the best pathway for that is really implementing offshore solutions and we still have opportunities today with new logos, within the communications vertical and many of those are leveraging the international or offshore operations.
And we're doing the same thing in Europe with that Vince. So, in fact that some of the seat additions that we've done is we've added some capacity into some newer offshore locations, so we can help get our cost structure in place. So, we can succeed in those verticals and John do you have…
Yeah, and just as well as Vincent in Europe we actually have had some nice success where as you know especially in Germany there is a lot of labor challenges in that marketplace and in that telco environment, we've actually been really successful convincing clients their solution has the operating model.
So, I think if you look at it total seats that we've disclosed at our home in the U.S., if we're having the top clients and some of those clients have moved offshore, but in the EMEA environment both in the U.K. and Germany, we've actually started to really roll out. So that's a lot encouraging for us.
Yeah, that was my next question, the at home business remains weak and those that you're experimenting overseas. So maybe Chuck can give me some color about what's happening in the U.S. and what verticals seem the best opportunity -- where you're seeing the best opportunities?
Yeah, Vincent the thing that we're looking at on a home agent side as John was talking about, right now the portfolio of customers that were being served on that platform from the U.S. most of that revenue reduction that you see, our customers that have moved offshore.
The second thing is that as you look at all the different industries that we target and go after, the retail sector is probably the one that I would say is most conducive for the home agent platform and while we've had growth in some additions there, I think we're all aware of some of the disruption that's taken place within that vertical.
So, we have seen within that segment some of their volumes not being quite as strong as they were in the past and that's made some adjustments. Now as we are saying that we do right now today have some new programs that we are putting back on to that platform.
So, we see it towards, still going to be a very relevant capability that we want to have in our portfolio. At least the one thing to keep in mind is that for us as a company, we really just want our delivery footprint to be in such a way that we have a bigger addressable market and we wanted to be served on the platform that really is going to allow us to maximize our profitability.
And the one thing about home agent that we do like is that when things do downturn, we don't -- we're not sitting here stranded within empty centers. So that is the one thing about it that we still would like to see more and more of the business get to that point.
And personally, I'm hopeful that just given some of the labor challenges, which really given what industry you serve, I think it's going to be felt a little different from every company if it's healthcare, if it's telecom, if it's banking, but there's no doubt that the U.S. labor market is extremely tight and I think that that may play to our advantage longer-term and just people wanting to consider using the home agent platform to try to address some of the recruiting.
If not, I think you're going to see more interest in offshore operations. I really do.
Okay. Thanks for answering my questions. I'll go back in the queue and nice quarter guys, thanks.
[Operator instructions] The next question comes from Bill Warmington of Wells Fargo. Please go ahead.
Hi. This is Bill Johnson on for Bill Warmington.
Hey. A few questions for you on XSELL, what capabilities does it bring to you and why do you structure the investment this way?
Well, we've been -- we've been very interested in this whole field of artificial intelligence candidly ever since IBM Watson won jeopardy. I remember going back and our guys have been researching it for quite a while. I'm sure you guys are doing the same thing and one of the things that you'll quickly discover is that there are many, many companies that are in this space.
So, we really did not feel inclined per se to go out and just do a full-fledged acquisition, but we did want to have a tight relationship that would allow us to really do a little closer working relationship like an R&D standpoint and let us be part of the service platform if you will of their operational platform, which we think is going to open opportunities.
What we like about XSELL is that XSELL is focused on two things that we're really inclined to be encouraged about. One is that it was more about helping clients generate sales opposed to trying to build self-serve chat box and things like that on the website.
The other thing is that the way that it's applied is not really being applied in the sense of putting a self-serve application on a website. It really is being applied on the human capital side of working alongside our people and helping them perform better.
In the industry people refer to that as human in the loop so to speak and we like that because our business is still very, very much labor driven as you guys know and particularly as we look now with the convergence at least that we see that's taken place between sales and service, so many of our inbound transactions today, our clients are wanting us to sell and the challenge is that when you go into an operation, the 80/20 rule always build still seems to apply.
Where 20% of your labor department -- your labor group is generating 80% of your sales and what we believe XSELL allows us to do is that through the artificial intelligence working alongside and it's almost like a sales coach learning from your best representatives, you began to shift that to where the 80% now shifts more maybe you've got 40% of your labor forces now generating the majority of your business.
So, the total sales throughput increases and we were just really, really encouraged and impressed with their platform and waited they really focus on more of a very specific aspect and the other thing that we like is that that's our view of the world.
We did go out and invest clearly and we do see the convergence taken place and we see it happening with our clients. So anyway, this is a relatively new thing for us and right now we're doing some test trials out there with some of the big clients and I'll just say we're really encouraged by it.
Okay. Great. Do you see other strategic investment opportunities like this? Is this going to be a large component of your strategy going forward do you think?
I will say that there are so many interesting things particularly when you look even not just on the technology side, the other one that we did is the OneSYKES platform that we did, that actually emerged out of our Alpine access acquisition.
And we're really excited about that too because the world of work is changing so dramatically and we believe that we as a company and we believe can wait as an industry we've all got to adjusted to that. We think that's part of the challenge with spiking our turnover and absenteeism.
It's that levels that we've never seen before in the 20 some years we've been in business and we think a lot of that has to do with the fact that we've got to change in the context in which our people work and trying to improve the content of the work itself and we think that some of these new technologies like the OneSYKES and investing in XSELL is going to be part of that and help us to solve some these human capital challenges that we have.
And in addition to that side, the human capital side on our core we are continuing to look for digital media, digital marketing opportunities as well to invest in and again that's because we really do see this convergence taken place where so many of these digital marketing technologies are going to have to be and in fact are being applied to the customer journey on the service side.
And we got some stuff there to figure out as we're getting the pieces button together, but we do believe that's the right view of the world and yeah so, we are going to continue to look at the landscape for those types of opportunities, smaller strategic ones that we would be doing.
Got you. All right. Well thanks guys. Congrats on the quarter.
The next question comes from Joan Tong of Sidoti & Co. Please go ahead.
Good morning. Chuck, you mentioned earlier that you would like to put the G&A reduction in the back burner after you get your utilization rate back to more normal level, get your capacity issue fixed. I'm just wondering why -- why not going concurrently, laying out especially if you're seeing opportunity to get that G&A expenses down?
Joan, it may just be, maybe it's a matter of my word choice. Keep in mind that when I'm talking about capacity, which is a big part of the G&A that we added, that is our general and administrative expenses. The part that I'm talking about saying that we'll have to wait and see how things play out is once it's the non-site related G&A and the reason why we want to wait is because as we're making plans right now to rationalize certain capacities or sites that we just deem maybe those labor markets are not going to work.
At the same time, we do still have opportunities that are coming in that that in fact we could put the whole sight back to work again. So, we don’t want to get ahead of ourselves and have our G&A cut too short when we can't service it with the proper infrastructure and everything that we have.
But I guess the point to remember when I'm speaking of G&A, I would put it in two buckets. It's the sight G&A and that we are -- we have plans we know what we're doing right now and going in and the only thing right now that maybe would disrupt those plans is if suddenly some of the opportunities in our pipeline have to do be doing about-face and we put it to work, which would be the better solution obviously.
But once we get that new kind of what I call the new normal if you will and where we see it, then we'll be able to make smart informed decisions about what I call the non-site related general and administrative.
And keep in mind too, I'm not outlining to every single point, but we are already are making some changes. We've already made some organizational changes. We've already simplified and consolidated. So those steps have taken place.
The ones that we can look at today and we know that we just need to do it, we don't have to wait for the sites for every bit of the non-site G&A. So, we are taking those steps.
Okay. Thank you. And then can you talk a little bit about Clearlink and just want to see how the performance was for this particular quarter and then cross selling opportunities and just want to see if the go-to-market strategy I think you have been having that concurrently with your core business or quite some time.
Just want to see if there is progress. Thank you.
Thank you. Clearly, we really believe for us as a company is going to be a very, very exciting strategic sector or vector if you will for us as a company to continue to evolve and we're really encouraged with it.
But the part to me that I would say right now is we have a couple of pilots working with some of our larger clients where they are letting us take over the total website responsibility that we use for advertising and in fact taken over the customer care support of it and we're using our digital marketing skills now to go in and to optimize the content, reimagine the content, that's both for marketing and for support.
In the same way that when you go to a website, you want to make sure that the content has been designed in such a way that it's compelling and that it's consumable and that people will say well, I want to act on this, let me speak to a sales representative.
Same thing for support, but we really haven't seen many of our clients quite as focused on the support side and they need to do that because they are all trying to lead digital first and so we're encouraged with the two pilots that we have going on.
It's a little bit of our own lesson learned because it is new for us as well, but those are the types of things that once you get one or two under your belt and we think the success will build on it as well.
The other thing is that as we look at the area of healthcare for us I would say that we believe the Clearlink channel if you will may be a better way for us to go in and access and build some opportunities in the field of healthcare, particularly as you think about some of the digital media properties and all that are out there in helping consumers make decisions about their healthcare needs.
So, it's a little complicated I think to explain on a telephone conversation. Maybe as time goes on, we'll be able to sit and give a little more of the deep dive on it, but strategically I feel -- still feel very, very good with the Clearlink opportunity and as I see and read everything that's happening in the world today, I'm really happy that we have that capability in our company because I feel like we've got stuff that's going to keep us relevant in the years ahead.
Financially speaking I don't know if John, if you want to add some color?
Financially it's basically as we always said, we're not really going to disclose its growth rate, but in excess of the site's range and as margins are as we expect Q3 was -- Clearlink had a really good Q3 as their strongest quarter and probably will move to the fight that Q3 is going to be seasonally our probably strongest quarter going forward.
So, there's really no negative news there. Just continuing to execute on their plan which is what we want them to do and as Chuck mentioned, we've got numerous pilots and programs now on the go where we're trying to merge Clearlink and Sykes services.
Thank you, guys.
The next question comes from Dave Koning of Baird. Please go ahead.
Yeah hey guys. Great job.
Yeah. And so, I guess first of all you had a really good pattern of setting guidance that it ends up being quite comfortable and executing well to that over a very long period of time on revenue. This quarter you're guiding up about 1% sequentially in rough terms. And I look back and usually Europe 4% or 5% sequentially in Q4.
It is that either A; to provide just a little bit of conservatism or B; were there a little bit a one-offs in Q3 whether hurricane, iPhone or whatever else in Q3 that might make the normal trajectory a little different?
Yeah, I think Clearlink is altering the Q3 to Q4 dynamics and we know that telco usually had a Q4 jump-off that's really not going to have that this year. I don't think that's conservative. I think that's what the forecast says.
We've also been really successful in the travel and transportation in Q3 as a pretty solid quarter for them and we've also got some education that nice in Q3. So, we've really got a little subtle change between Q3 and Q4 going on David that really means historically if you buy we probably got slight change there.
Okay. That all makes sense, that's good. And then the margin like this year when we think about the margin being in the low sevens or whatever there's headwinds from some of the utilization issues and then that acquisition of the portfolio that came out at a lower or negative margin and then there's a little tailwind from the reversal of those incentives that happened this quarter, but the net -- is it fair to say the net of this year is a lower than normal year when we started thinking about the future, I think of this year as a little bit of a depressed year. Is that fair?
Yeah, we're absolutely committed to 8% to 10%. If you look at this year David the headwind from the U.S. is about 200 basis points for the year. That's how significant it is. Also at 200 basis points, roughly half of it because you got capacity we don't need, the other half is the labor challenges, hiring, attrition all of those issues.
So, as we work those and address those then that's the scale of the improvement you should start to see coming through the numbers, but yeah, I would say this year we definitely view as a depressed year due to the U.S. challenges and as we fix them we don't need to get the utilization to 85% as you look by to 2015 when we got to 80%, you really saw the margins coming through.
And so, in terms of when you're looking at the numbers, that's the number that I would say is that number again towards the 80% and the other one is going to be on the gross margin side as we address the labor challenges and hopefully either move business offshore, move our home, get price changes whatever those decisions are that clients make is to how we effectively right size and adjust the U.S. margins.
Got you. That makes a lot of sense too and I guess one quick aside, but one quick follow-up from that first question, all the seasonality in Q4 that was a great explanation, but was there anything in Q3 from like to the hurricane caused the movement either way at all or was it pretty much a non-factor?
No. We actually had some positive and some negative that's pretty much washed out. We hired a couple of sites that lost a couple of days, but we gained it because the travel disruption. We got volume there. So, I would say it's something we probably see the wash and really not worth talking about in terms of the numbers.
Okay. Great. Well thanks guys, good job.
This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Sykes for any closing remarks.
All right. Thank you, Andrew. Just thank you, everyone and as always, we appreciate your interest and your questions and the company and we look forward to updating you guys in the Q4. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.