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Edited Transcript of SYKE earnings conference call or presentation 6-Nov-18 3:00pm GMT

Q3 2018 Sykes Enterprises Inc Earnings Call

TAMPA Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Sykes Enterprises Inc earnings conference call or presentation Tuesday, November 6, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles E. Sykes

Sykes Enterprises, Incorporated - President, CEO & Executive Director

* John Chapman

Sykes Enterprises, Incorporated - Executive VP & CFO

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Conference Call Participants

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* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Joshua David Vogel

Sidoti & Company, LLC - Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

* William Arthur Warmington

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Sykes Enterprises Inc. Third Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. 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.

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

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [2]

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Thank you, Myrtle, and good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises third quarter 2018 financial results.

Joining me on the call today are John Chapman, our Chief Financial officer; and Subhaash Kumar, our Head of Investor Relations.

On today's call, I will make brief remarks about the quarter and then touch on Symphony. And after that, John will take you through the numbers, and then we'll turn the call over for Q&A.

Overall, we built on the progress we achieved in the second quarter. As we entered the third quarter, the key focus was delivering on the capacity rationalization targets. And I'm pleased to report we made good on that objective.

We rationalized another 1,900 seats, representing roughly 4% of our total capacity. Recall, we had plans to rationalize roughly 10% of our excess capacity over 1.5-year period. We have now rationalized approximately 8% of our capacity base year-to-date.

The benefits of the capacity rationalization can be seen in our third quarter 2018 non-GAAP operating margins, which, excluding the legal settlement costs, would have exceeded the top end of our implied outlook range.

In addition, these actions position us well for the fourth quarter when we expect 100 basis points of non-GAAP operating margin improvement over the same period last year.

Against the strong execution on rationalizing excess capacity, we continued to address the operational inefficiencies around recruiting and retention. As we have discussed before, this operational drag is also costing us an incremental 100 basis points in terms of operating margins and needs to be addressed on multiple fronts. Therefore, we continue to tweak and overhaul, where practical, almost every aspect of our human capital management strategy in the U.S.

In addition, we are making headway in getting clients to commit to new wage and price levels in the marketplace.

At this point, we are still in the early innings in terms of achieving success, but we remain cautiously optimistic, given the action plans set in motion. In fact, we believe we still see a path back to the 8% to 10% long-term margins as we exit 2018.

In summary, our third quarter results marked another quarter of progress in terms of capacity rationalization and margin enhancement. Amid all this, we continue to reinvest in our core business, both organically and inorganically through our strong balance sheet and solid cash flow generation.

Now I would like to take a moment to discuss our thoughts behind the acquisition of Symphony Ventures Limited, which we closed recently.

As you are aware, Symphony is a best-of-breed robotic process automation or RPA provider. And as the term implies, RPA encompasses automating a series of human actions in a business process. Symphony has developed a solid growth profile in a very short period, expanding rapidly across a nice distribution of blue-chip clients, verticals and global delivery, by targeting the C-suite. The fact that Symphony is recognized by various industry analyst firms as a premier provider and is often positioned against leading strategy and IT services players is also a testament to the fact that despite its size, it punches above its weight. The catalyst for acquiring Symphony is being driven by the dynamics of what clients are increasingly seeking as we go to market, which is, in part, being driven by secular forces in the broader economy.

As digital continues to remain a disruptive force, challenging existing business models and shaping new ones, our current and new clients are looking for providers that can help them with their journey. In our domain of customer care, given the disparate number of touch points clients have with their end customer, the journey is siloed, complicated and expensive. Clients want subject matter experts in the domain of customer care with the breadth of capabilities around marketing, sales and service. But just as important, they are seeking partners that can optimize each process around those capabilities and along the journey, making it more streamlined and efficient while delivering an effortless customer experience.

On cue, the acquisition of Symphony, we believe, will help us address a critical piece of that operational friction. In order to better understand the power behind Symphony, let me walk you through a very simple, yet tangible, example that has upstream and downstream benefits.

When a consumer calls in for support, often the agent handling that specific transaction has to toggle through various IT systems to piece together a more actionable profile of the customer. With Symphony, we could create a streamlined and unified profile of that customer with relevant information that automatically gets populated, thus driving down support times, increasing accuracy and delivering higher customer satisfaction while also reducing the speed to competency for agents in having to learn multiple systems.

Outside the domain of customer care, Symphony also provides the right entry point to access new opportunities that are either in its core market of back and middle office or that are end to end in scope. These are just some of the ways Symphony can have a major impact on our business and deliver outcomes for our clients.

While it is early to say how the market for RPA evolves or how client organizations deal with silos, such as front, middle and back offices, automation is real and is being embraced.

We further believe having proven capabilities through Symphony positions us as a thought leader in our marketplace.

Moreover, it drives differentiation by expanding our suite of service, thus helping us to capitalize in penetrating new and existing clients and verticals.

I'm truly excited about the Symphony acquisition and look forward to showcasing its success as we map out our joint go-to-market strategy, economic model and focus over the coming months.

With that, I'd like to hand the call over to John Chapman. John?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [3]

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Thank you, Chuck, and good morning, everyone. On today's call, I'll focus my comments on the third quarter results, particularly key P&L, cash flow and balance sheet highlights, after which I'll turn to the business outlook for the fourth quarter and full year 2018.

Let's start with revenues. In the quarter, we reported revenues of $399.3 million versus our third quarter guidance of $402 million to $407 million. Of the $5.2 million delta between what we reported and the midpoint of our third quarter guidance, $2.3 million was foreign exchange fluctuations, and the remaining $2.9 million was largely a result of softness in the communications vertical, which was primarily operationally driven.

Looking at revenues on a year-over-year comparable basis, we were down 2% on a reported basis and down 1.1% on a constant-currency basis.

By vertical market and on a constant-currency basis, other, which includes retail, was up around 21%; transportation and leisure, up 11.5%; health care, up 8.2%; technology, up almost 6%; and financial services, up only around 1%; all of which was more than offset by the impact of the communications vertical, which was down roughly 18%.

It is worth noting that excluding the impact of the previously disclosed strategic decision to discontinue our program, the financial services vertical would have been up 8.4% on a constant-currency basis.

Third quarter 2018 operating margin decreased to 3.6% from 6.4% for the comparable period last year. Third quarter 2018 operating margin includes the impact of acquisition-related intangible amortization, capacity rationalization-related charges, legal as well as merger and integration costs, all totaling 420 basis points.

The year-ago period was impacted by 195 basis points of similar costs. On a non-GAAP basis, which excludes the impact of our acquisition-related intangible amortization, capacity rationalization charges and merger and integration costs but includes the 40 basis point impact of a wage and hour lawsuit settlement, third quarter 2018 operating margin was 7.4% versus 8.2% in the same period last year due to softness in the communications vertical and operational inefficiencies related to recruitment and retention challenges in the U.S.

Third quarter 2018 diluted earnings per share were $0.33 versus $0.52 in the same period due to aforementioned factors.

On a non-GAAP basis, third quarter 2018 diluted earnings per share was $0.59 versus $0.62 in the comparable period, with a $0.04 benefit from lower interest and other expenses in the current period versus a year-ago period, partially offset by $0.03 of cost associated with a wage and hour lawsuit settlement.

Relative to the business outlook range provided in August, third quarter 2018 non-GAAP diluted earnings per share of $0.59 was $0.02 higher than the midpoint of the range of $0.55 to $0.58. The $0.02 outperformance from the midpoint was from lower other expenses. That outperformance was tempered by the impact of the lawsuit settlement, which was $0.03 per share.

Turning to our client mix for a moment. We continue to have only one 10% client, our largest client, AT&T, which represents various contracts, including the demand generation business from Clearlink, represented roughly 11% of revenues in the third quarter of 2018 versus 13.9% in the year-ago period, driven by a combination of lower demand and operational inefficiencies.

Our second largest client, which is in the financial services vertical, represented almost 5.8% of revenue in the third quarter of 2018 versus roughly 7% from the year-ago period. That reduction was driven primarily by a previously disclosed strategic decision to discontinue a program due to a lack of long-term viability related to the labor market challenges in certain U.S. markets.

On a consolidated basis, our top 10 clients represented approximately 44% of total revenues during the third quarter of 2018, down from 48% from a year-ago period due to aforementioned factors.

Now let's turn to select cash flow and balance sheet items. During the quarter, capital expenditures were down to 2.7% of revenues from 3.1% in the year-ago period. Trade DSOs on a consolidated basis for the third quarter were 75 days, up 1 day on a comparable basis. The DSO was split between 73 days for the Americas and 83 days for EMEA.

Our balance sheet at 30th September remained strong with cash and cash equivalents of $157.3 million, of which approximately 86.4% or $135.9 million was held in international operations, the majority of which will not be subject to additional taxes if repatriated to the United States.

At September 30, we had $82 million of borrowings outstanding with $358 million available under our $440 million credit facility.

We continue to hedge some of our foreign exchange exposure. For the fourth quarter and full year, we're hedged approximately 88% and 84% at a weighted average rate of PHP 52.33 and PHP 51.81 to the U.S. dollar, respectively.

In addition, our Costa Rica colon exposure for the fourth quarter and full year are hedged approximately 85% and 78% at a weighted average rate of roughly CRC 588.11 and CRC 584.89 to the U.S. dollar, respectively.

Now let's review some seat count and capacity utilization metrics. On a consolidated basis, we ended the third quarter with approximately 49,600 seats, down 2,800 seats comparably. The company rationalized roughly 4,200 additional brick-and-mortar seats in North America on a year-over-year basis, which was partially offset by seat additions internationally.

The third quarter seat count can be further broken down to 42,100 in the Americas region and 7,500 in the EMEA region. Capacity utilization rates at the end of the third quarter of 2018 were 69% for the Americas and 76% for the EMEA region versus 70% of the Americas and 80% for EMEA in the year-ago quarter. The decrease in the Americas utilization was driven by lower demand and operational inefficiencies, while the reduction in EMEA was also driven by lower demand in the communication vertical.

The capacity utilization rate on a combined basis was 70% versus 71% in the prior year-ago period, with the decline mainly due to previously stated factors.

Now let's turn to business outlook. We are raising our full year 2018 diluted earnings per share outlook due to a lower-than-expected effective tax rate as well as lower other expenses.

Concurrently, we are lowering our full year 2018 revenue outlook by approximately $7 million relative to one provided in August 2018. Roughly $4 million of the revenue revision is related to foreign exchange rate flux, with the remaining $3 million being driven principally by the communications vertical, which is driven primarily by staffing inefficiencies.

Despite the full year revenue revision relative to our August 2018 business outlook, our full year operating margin expectations remain unaffected. Although the communication vertical remained soft, we recently won some potentially significant long-term opportunities that could drive growth in that vertical in the latter half of 2019.

Separately, similar to the third quarter of 2018, we anticipate the benefits of the capacity rationalization initiatives to continue to flow through in the fourth quarter of 2018. Those benefits are expected to result in 100 basis point improvement in our non-GAAP operating margins over the fourth quarter.

On November 1, 2018, we consummated the acquisition of the pureplay and best-of-breed robotic process automation provider, Symphony Ventures Limited, which is expected to contribute approximately $4 million for the remaining 2 months of 2018 to fourth quarter 2018 revenues and is reflected in the full year revenue revision. However, we still anticipate the impact of the acquisition to full year 2018 diluted earnings per share to be dilutive on a GAAP basis and neutral on a non-GAAP basis.

Our fourth quarter 2018 business outlook anticipates a pretax charge of approximately $0.7 million or $0.01 on an after-tax basis related to capacity rationalization. The pretax charge is expected to be cash.

The full year outlook also reflects a pretax charge of approximately $22 million or $0.40 on an after-tax basis, split roughly evenly between noncash and cash. Our revenues and earnings per share assumptions for the fourth quarter and full year are based on the foreign exchange rates as of October 2018, therefore, the continued volatility in the foreign exchange rates between the U.S. and functional currencies of the markets we serve, could have a further impact, positive or negative, on revenues, on both GAAP and non-GAAP earnings per share relative to the business outlook for fourth quarter and full year.

We anticipate total other interest expense, net of approximately $1.2 million for the fourth quarter and $3.7 million for the full year. The amounts in the other interest income expense, however, exclude the potential impact of any foreign exchange gains or losses.

We expect a further reduction in the full year 2018 effective tax rate compared to what was provided in August 2018 outlook due largely to discrete benefits in the third quarter.

Considering the above factors, we anticipate the following financial results for the 3 months ending December 31: revenues in the range of $415 million to $420 million; effective tax rate of approximately 17%; on a non-GAAP basis, an effective tax rate of approximately 19%; fully diluted share count of approximately 42.3 million; diluted earnings per share of approximately $0.53 to $0.57; non-GAAP diluted earnings per share in the range of $0.65 to $0.69; capital expenditures in the range of $8 million to $10 million.

For the 12 months ending December 31, we anticipate the following financial results: revenues in the range of $1.625 billion to $1.630 billion; effective tax rate of approximately 8%.; and on a non-GAAP basis, an effective tax rate of approximately 16%; fully diluted share count of approximately 42.2 million; diluted earnings per share of approximately $1.28 to $1.32; non-GAAP diluted earnings per share in the range of $2.09 to $2.13; and capital expenditures in the range of $45 million to $47 million.

And with that, I'd like to open the call up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Vincent Colicchio with Barrington Research.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [2]

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Yes, Chuck. I was wondering if you can give us a sense of what portion of your U.S. revenue today continues to generate subpar margin.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [3]

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I would say here today, just in answering that, we're probably down to really where the capacity utilization is, being at 8% versus our targeted 10%. So we've probably got right now remains about 15%, 20% of that target that we need to address, Vince of the U.S. portion.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [4]

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And what was the capacity utilization rate in the U.S. in the quarter versus the comparable periods?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [5]

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Yes, it's mid-60s, Vince.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [6]

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69%.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [7]

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It's still just above 65%. I mean, again, I think we spoke about the U.S. brick-and-mortar that's a kind of drag is about $300 million in total revenues. And we've disclosed we have significant capacity to grow in the U.S., and we've also said that some of these programs still need to be adjusted going into 2019. So you'll see that -- that 100 basis points is still a drag. It's kind of a combination of programs that are still not quite there, and we've got excess capacity that we need to grow into. In terms of where we're going to get that 100 basis points is -- it's a mix of the 2. I suspect we're probably around 30, 40 basis points of that 100 from improving contracts that we've currently got on the books. And probably 60, 70 is filling the capacity that we've got and realigned, and we've got capacity in -- as we feel -- and labor markets that we can succeed in and got a cost structure we can succeed with, Vince.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [8]

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And then Chuck, on Symphony, can you give us some more color, maybe historical growth there, margins, sales cycles and the kind of ROIC you expect in the business?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [9]

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Yes. We're still -- when you look at the company and the history from like 2014, obviously, it's still pretty early on, but the growth has been exceeding double digits in a significant way. And the thing that we're really excited about, the Symphony on, Vince, is kind of twofold. One is today, with our existing base of business and particularly as we want to continue to find better ways that we can penetrate and grow additional verticals, we really need to enter with a differentiated model, and when you couple today with a tight labor markets, which I think is going to be a theme that we're going to all be hearing about for quite some time, particularly in developed economies, automation's going to be really, really key. So we're very hopeful about that. But the part to me that I get more excited about is as time goes on, within Symphony, and companies are deploying farms of these robotic processes, they're going need to be supported. And so Symphony made a significant investment in the last 1.5 year, building these particular technical support centers that have the infrastructure in place that can then manage these deployed farms of robots. I -- in my simple way in looking at that and understanding, I kind of think of it back in the day when you think of networks being deployed and we ended up having to build infrastructure to support switches and routers. So I see a very similar environment that's being created here, and I think that's where, as time goes on, you're going to start seeing the growth of that business and the margin profile change for us. In terms of sales cycle, it's still really new and with a number of clients they have. But normally, I would say, by the time they get a lead today -- because keep in mind one thing about Symphony, a lot of people are doing RPA today, but they have identified partner status with some of the leading RPA vendors, and these vendors turn to their partner networks, which they want to keep somewhat limited. They can't manage thousands of these companies. So when they hand over a lead, the client is already pretty much determined that they want to do RPA. So the sales cycle probably runs, I would say, somewhere around 6 months at that point in time. And it enters very much in a traditional, consultative design type of workshop of thinking. Other than that, if you were knocking on the door for just first time introducing yourself, you're probably looking at cycles that would get up to 9 months, I would think, maybe even a little longer. But given the way that their leads are generated, they're pretty short right now in a way that that's -- other questions or comments, John? Maybe you would...

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [10]

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No, just -- I mean, you're right, Chuck. I mean, the sales cycle can vary depending on whether a client's already picked an RPA vendor, and it's about implementing a strategy versus growing a brand-new company and convince them of an RPA strategy, and looking at all the players that are there in software and making a choice on which ones suits the purposes of that company, et cetera. So it can vary, but I agree with the time frame you've spoken about.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [11]

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Yes. And Vince, I'm sorry, on your last comment -- question made, when you're looking at return on invested capital, I mean, look, we see a margin profile here that's going to be considerably more than what we look at right now with our core business that we're operating in. And certainly, with those margins and the growth, we're very confident we're going to be exceeding our return on invested capital targets, which is somewhere around 12% target range.

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Operator [12]

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The next question comes from the line of Joshua Vogel with Sidoti & Company.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [13]

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I guess, my first question is more high-level. We're seeing some volatility in the market, concerns around a potential economic downturn. Last cycle, you grew through it, in '08 and '09. Curious, does the business model hold today or if things changed since that potentially make you more or less sensitive to consumer spending habits?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [14]

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Yes. Josh, it's interesting. I -- the -- despite the characteristic of our business somewhat being lumpy as we look at things, that's more a factor of our client portfolio mix than it is, I think, the way that we have to deal with these economic cycles. The good thing about our business that I've always loved is that in good times, companies need to outsource to grow and in difficult times, they need to outsource to get efficient and reduce costs. We're certainly not immune to that inflection point, if you will, which I would say we're kind of in the middle for one of those inflection points right now, but that inflection point for us today though is more related to, again, the concentration that we had with a particular vertical and really more so, with particular clients. And the fact that we built into U.S. right at a time when the labor market was really constricting. So once we get adjusted to that, we feel like we'll be able to continue to find growth. As you pointed out, we had some really nice numbers in the 2008, 2009 time period. And I know at that time, we were having to answer questions as to how were we doing that. And I think it's just that those companies used outsourcing for growth strategies and for cost strategies. I don't know, John, so other (inaudible).

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [15]

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Okay, great. Can you remind me what's been going on with AT&T? We know that Clearlink also has AT&T as a customer, but what is the underlying business doing outside of Clearlink? And when should we expect comps to get better?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [16]

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Yes, I -- in a nutshell, there's a couple of things that are happening there. Number one, within the communications vertical, and it's not immune to the communications vertical, and what I'm about to say kind of supports why it is that we're excited about Symphony becoming part of the company here, contact rates and things within those industries, they've made some good headway. I mean, we've seen numbers as much as 25%, almost 30% of number of active contacts per month per active account in certain industries. And I think the communication sector has been able to achieve that for some of the simple transactions, which is a theme that I think are collectively, our industry fills, is going to be taken place. On top of that though, I do think some of the growth areas and everything within communications, as an industry, I mean, it hasn't been as robust as it was when the iPhone, smartphones were first coming out, competition with billing plans, so forth, so on. So you have seen some of the volumes there in that regard adjust, and then compounding that, and particularly for us, this may not be shared or experienced with all of our competitors that we have, but the fact that we had quite a bit of our delivery footprint in the U.S., right at a time when the labor market was getting really, really tight. And wages in our sector, I mean, I know we read and see in the news, they talk about 2%, 2.3%. But guys, they are going up. I mean, it's double digits, I mean, easily within our sector. And if you're not, it's creating a lot of challenges within turnover, and I think you'll find that as a common theme. Now look, I mean, going to our clients and asking for price increases to cover all of that, I mean, they understand it, but it's not an easy thing for them to do. So we're now having to look at probably growing a little more offshore to support that sector. We still believe very much in the communication sector. It's a large part of the market. But we do need to make sure that we've got them in the right shore solution that's conducive to serving them. So you've got contact rates, you've got overall growth strategy of things that's happened, and you've got -- particularly for us, we were disproportionately servicing that vertical from the U.S., and we're getting hit right now with the labor market challenges. So we're about to cycle through that though. I mean, I think between combination of offshoring and just things kind of leveling out, we should be coming to an end to that.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [17]

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Okay. That's very helpful. And now just looking at the Symphony deal, seems pretty exciting. I guess, my question or -- as your digital delivery platform continues to expand, are you looking at any other technologies out there, like RPA, that you think would be good complements to your business? And maybe can you talk to what the market presents from an acquisition standpoint? Do you prefer the Symphony-type opportunities out there? Or are you also exploring transformative Clearlink-type deals or both?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [18]

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Yes, we are -- for us -- I think over the last couple of years in these calls, we've tried to share with all of you guys how we think about the big trends that are driving our thinking. And we've always thought that labor was going to become an issue. Hence, our investment with Alpine Access, granted maybe we were a little bit ahead of the curve, but I think now, it's here, and we're getting people again to kind of rethink if they want domestic solutions, the home agent platform. We've also looked at the convergence, and the convergence for us was convergence between marketing, sales and service. What's interesting is you're now hearing kind of another layer of convergence that some industry analysts are referring to as kind of a one office concept. And that is where front and back office, they're now calling a middle office, if you will, are all going to become very seamless. And I think RPA is a technology that's going to become embedded in connecting all of these systems in order to create a more unified, seamless customer experience. You look at some banks today, and they've got 700 core systems. And to some extent, you think, well, why don't you re-platform? But the return on investment that they're getting from deploying RPA solutions to create these more seamless integration points is really is too hard to turn down. And we want to be part of that. So labor, convergence and this theme of automation. RPA right now is one we're really excited about because we feel it has application across the entire commerce value chain of marketing, sales and service. Clearlink, as you know, was simply adding our commerce value chain capabilities from just being a post-sales support company to truly being a fully customer engagement services company, marketing, sales and service. And now with RPA, we think we're going to be able to help clients even connect some of those middle office systems to work with their front-end systems to create a more seamless experience. So anyway, in terms of looking at opportunities, those strategic filters for us, clearly, in the area still. Anything in intelligent automation or like we invested in Excel with artificial intelligence. They hit our radar, but we really want to see things that we think are differentiated, things that we think that we can bring into our company versus maybe we're better off just investing. And certainly, as we look in the area of marketing, sales and service, we continue to look at companies that, if we think they're doing compelling, differentiated solutions that can accelerate our presence into those capabilities, we're going to look at it. But I don't really see us doing major, disruptive, big types of deals. Again, we just really always felt that the world's changing right now, and we need to continue to invest to make sure that we're staying relevant, for the way the world is changing right now. I hope that helps. I mean, it's a lot to sit down and talk about, but...

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [19]

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No, that's definitely very helpful.

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Operator [20]

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

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [21]

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So first question about the financial services vertical. The discontinued program that happened in Q2, how has that ramped down? And when do you anniversary that impact? Is it as simple as Q2 next year? Or is it some other date?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [22]

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Yes, you're absolutely right, Bill. It's as simple as that will be the end of second -- end of the first half of next year until we anniversary it. So for financial services vertical, as we spoke about, that one program's got a 7% drag on that vertical's number until then. And overall, it'll have a 2% drag for the global revenues. So when we eventually go -- guide for next year, all things being equal, you'd expect to see that flowing through the numbers.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [23]

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Okay. Now excluding that one piece of business from that large financial services client, are you growing with that client now?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [24]

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We are, yes.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [25]

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Yes, yes.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [26]

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Bill, I think it's important that the comment is -- which I think you all already know this, but just for the clarity with it, I mean, that decision on our part was related to the challenges. We were just too big in a particular labor market. The unemployment rate had gotten down below 3%, and wages were moving, and it just was not sustainable for us, and we didn't have a great alternative solution for our customer. So we had to discuss with them and work through that, and they found a solution for that. But it just -- we just can't sit here and just keep operating with that type. That will structurally break the model for us in doing it. So no, we still -- we have a great relationship, and we are still growing with that customer.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [27]

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So that leads me to the next question, which is, in Q3, if you can quantify this, how much business actually moved off shore? And then as you look out at your pipeline, how much of that is business moving off shore? Because it just seems like if you're in the U.S., you're in a tough spot.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [28]

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Yes. I think what you're going to find is for the communications vertical, and this is interesting as of just meetings we had yesterday, I think you're going to find a much stronger interest in the offshoring. But in the field such as insurance or even areas within banking, I still think they're going to be looking for domestic-based solutions. But the industry is having to adjust their expectations of what they're going to need to pay to support the new wage levels that we have. I think healthcare, dependent of its payers versus some of the maybe medical equipment providers or things, it will probably be a little bit of a mix, almost 50-50. But they're all going to be a little different with it. Bill, this is -- in a general statement, I do believe you are going to see more interest in offshoring and near-shoring just because of the labor market challenges, but not across every industry. It's what makes it always difficult, Bill, to try to answer the question generically, because it really is by industry. In terms of the numbers that went off, I -- wasn't significant.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [29]

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Yes, we -- there's not been a -- there's definitely not been a material shift really year-over-year Q3 this year versus Q3 last year. The reduction telco is as much our inability to staff in the U.S. as our migration offshore, Bill. But as Chuck says, we have new opportunities in that vertical, which we think will help us get back to growth in the telco next year. And Chuck's absolutely right. Its clear clients or prospective clients are looking at near and offshore as opposed to the U.S. from both a supply of labor standpoint and obviously, from a cost standpoint.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [30]

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Yes.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [31]

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So that would also seem to support your thesis on having an easier time hitting the margins, 8% to 10%, going into 2019. But in terms of having higher margin, but the concern would be that you still have that revenue headwind as you have more business moving offshore.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [32]

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Well, I don't -- we don't look at our U.S. portfolio as it is right now and see a huge migration to that offshore. I think we've reduced the telco exposure. We've kind of moved forever. The client was going to move there. I think the bulk of what's left is sales and service business. And it's called a higher-end telco that we see remaining. The new stuff, you're absolutely right. We need more FTEs to make up the revenue. But I don't see us having a headwind or migrating significant chunks of U.S. offshore next year.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [33]

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Okay. And then one question on Symphony around the revenue model. So what is the actual revenue model for the company today on a stand-alone basis? And then how are you going to use that company to generate incremental revenue? And what I'm getting at is, are the buyers of your service today, within your clients, the same people who are cutting the checks to Symphony? Are they going to actually be able to do -- to buy that service? Are you really going to a different buyer group within the organization?

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [34]

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Yes, it's a great question. And in some cases, it is a different buyer, Bill. But in many cases, it is the head of operations in which our customer care operations fall underneath. And those are the ones where we're really excited about having that capability. Look, I mean, one of the things right now, we want to be able to go to our clients today, particularly those that want domestic solutions, and do more than just say, hey, we need a price increase to cover wages. I mean, that's never -- I mean, even though everyone understands that, that's never a great way to go and approach and try to solve issues with it. So we can go to them and say, we think we still need a unit rate increase because of wages. It's not as material as we think because we also think that we have found ways to improve productivity with this A.I.-enabled workforce of 10% to 30%, and we'd like to bring in our RPA partners to come in and sit down with you. Clients are very, very interested in that aspect of it. And they really -- you read a lot about, is RPA working, is it not working. Well, one of the reasons why it's not working is because people are doing kind of what they call, in fact Symphony called this, random acts of automation. I think you've got a lot of people that are just trying to learn and work with the technology, but the problem is, they're picking the wrong use cases. And there is a knowledge that goes behind that, to pick the right use cases, to give you your returns. And we think our marketplace is going to be very, very interested in wanting to hear more about our capabilities there, which is just a great way to go in and try to open the doors because as you know, I mean, we have good competitors. We have insurance competitors. And if you're going to go try to break into some of their territory, you've got to be a little different. And we think this is a key way to be able to do it.

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Operator [35]

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(Operator Instructions) The next question comes from Dave Koning with Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [36]

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Yes. And I guess, my first question, is it fair to think of the Q4 margin expansion of about 100 basis points -- I know that that assumes a lot of the capacity rationalization. Is that kind of the way -- the new level -- like, it would even take this full year in the high 60s, let's say, add 100 basis points to that to kind of take the normalized, maybe the high 7s percent range is kind of your normalized post-capacity rationalization-type margins going forward? Or are there other puts and takes, whether it be acquisitions or anything else we should kind of be thinking of as we look forward?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [37]

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Yes, David. I mean, we are not going to guide. I think you asked this question last quarter. But we're not going to guide next year, but I think your thinking is sound. I think there's always more puts and takes than a simple, kind of, 100 basis points that we should see. But you're absolutely right. If you look at our Q4, we had a great improvement, Q2 to Q3. Our Q4 is in that 8% to 10% range. If you look at it, it's kind of, I think the midpoint is around 8.6%. And if you follow through the improvements we've made and the kind of heavy lifting we've done in the U.S., you're absolutely right. We should see that flowing through once we get to guidance at the end of next quarter.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [38]

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Okay. No, that's helpful. I appreciate it. And then how big during the quarter was WhistleOut in the Portent acquisition? And did those all hit North America?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [39]

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Yes, WhistleOut is North America. And WhistleOut was about $3 million of revenues. I mean, its adjusted operating margin is, obviously, significant above margin, but at $3 million, obviously, it doesn't make a huge impact to the total numbers. In terms of Portent, I mean, remember, Portent is only $5 million of annual revenues. So the impact year-over-year is tiny. It's -- it just doesn't register and anniversaried effectively in June or July this year. So we had 2 extra months of a $5 million annual contract. It really didn't move the needle.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [40]

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Got you. Okay. And then the last one, and I know you're not guiding to next year, but if we just think of this year's tax rate, I know the non-GAAP tax rate is 16%, but what would have been normal this year without the discrete benefits? Just so we can think of what kind of a normal tax rate would have been.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [41]

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Oh, you're -- again, I think I've always said that we will see our tax rate in the low 20s. I'm not sure the exact number this year, David. I'd have to go back and kind of calculate it because we've got discretes all the time. But in terms of modeling, we've always said, and at this point, I wouldn't say we would change it, but it's really low 20s that we'd see going forward.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [42]

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Okay, that's helpful. And then I guess, finally, just when do you think North America can turn back to growth? I know it's been down just a little bit the last few quarters now, and historically, it's been a nice business. But is that something that when you get the bigger client add late next year, is really the back half of next year, when you're starting to think, hey, we have a pretty good insight -- line of sight to growth again?

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [43]

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You mean in Americas rather than North America, David?

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [44]

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Oh, yes. Yes, I mean, Americas. Yes, I'm sorry.

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John Chapman, Sykes Enterprises, Incorporated - Executive VP & CFO [45]

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Okay. Yes, you're right. I mean we, obviously, have got headwind from the financial services client you spoke about. But as we've also spoke about, we've got a new large telco that we see, assuming we execute on the initial ramp that we have, which is not insignificant, then we do -- also believe there's more opportunity with that one client, together with, obviously, the tailwind that we hope that Symphony will give us when we go to market and try and win a disproportionate share of new deals out there. We should see that. Exactly when, again, we'll see how the numbers look when we give guidance, but those -- the negative over the financial services client will be gone by the end of second quarter. We'll have the positive of the new client and telco coming in. Exactly how those numbers all fall out, I wouldn't like to guess right now.

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Operator [46]

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This concludes our question-and-answer session. I would like to turn the conference back to Mr. Chuck Sykes for any closing remarks. Thank you.

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Charles E. Sykes, Sykes Enterprises, Incorporated - President, CEO & Executive Director [47]

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All right. Thank you, Myrtle. And thank you, everyone, as always, for the participation on the call, and we hope everyone has a good day. We look forward to updating you guys next quarter. Take care.

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Operator [48]

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