Sykes Enterprises (SYKE) Q3 2019 Earnings Call Transcript

Sykes Enterprises (SYKE)
Q3 2019 Earnings Call
Nov 05, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Sykes Enterprises, Incorporated third-quarter 2019 financial results conference call. [Operator instructions] Please note, this event is being recorded. Management has asked me to relay 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 in 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.

Chuck Sykes -- President and Chief Executive Officer

OK. Thank you, Judith, and good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises' third-quarter 2019 financial results. Joining me on the call today are John Chapman, our chief financial officer; and Subhaash Kumar, our head of investor relations. I'll make brief remarks about the quarter on today's call and then talk about our sales opportunities.

After that, John will take you through our numbers and then we'll turn the call over to Q&A. Hopefully, you guys will be able to understand me as I'm speaking with my voice still having some challenges here. It'll go in and out. Sometimes it'll work well and other times it will sound like it is right now.

But as long as you can understand me, that will be good. So let's start with the third-quarter results. From an operational standpoint, we continued to make nice underlying progress. The range of actions encompassing capacity rationalization, price increases and program reassuring, starting in late 2017, paid off nicely again in the quarter.

Gross margins in the third quarter reached levels not seen for a similar period since 2010. Operating margins in the third quarter came in better than expected, both relative to the year prior and to projections. As a complement to that, we have revised our operating margin projections upward for the full year of 2019, which is a further testament of our operational strength. We increased our capacity rationalization -- our capacity utilization to 73% from 70% in the year-ago quarter while still maintaining a diversified client base, in which no one client is greater than 10% of our overall business.

Also in the quarter, we sustained our strong balance sheet with a net cash position. This has enabled us to not only reinvest in the businessed, but has allowed us to return cash back to our shareholders through our share repurchase program. So overall, we continue to be pleased with the progress we are making. Let me now talk about the revenue dynamics in our business.

We continue to feel positive about our sales momentum and are comfortable with the current 2020 consensus revenue growth projections. What's given us confidence about our revenue trajectory is, first, there's deeper integration among our full customer life cycle offerings around digital transformation, engagement services and digital marketing. Second, with the actions we've taken around capacity rationalization and operational simplification, we have closed alignment in our sales model. And third, the continued message refinement about our full customer life cycle value proposition and our go-to-market approach is resonating nicely in the marketplace.

And while these improvements are yielding results, they are being masked by the noise from our once largest client. For instance, over the last four years, our revenue growth on an organic constant-currency basis has averaged roughly 1%, but after stripping out the impact of our once largest client, which peaked at 17% of total revenues in 2015, our revenue growth on an organic constant currency basis jumps to an average of roughly 4% over the same time frame. Under that methodology, the pace of growth in the third quarter of 2019 was trending at similarly strong levels and is expected to even accelerate in the fourth quarter of 2019. And now that the once-largest client will be just a third of its former size, any further reduction in his business should increasingly have diminished impact.

Another factor that is slightly masking our revenue growth on a couple of elongated client ramps. Last quarter, we stated that we are ramping new clients and programs, some of which are significant in slope. Just to highlight the scale, in some of these programs, we are onboarding more than 1,000 agents. Now the good news is that for most clients, the implementations are right on track.

But a couple of clients, one who is new to outsourcing and another who has changed the agent hiring profiles is creating a short-term impact on our revenues because we've had to modify our recruitment and training approach for this client, which is stretching out the training duration and the speed to competency trajectory. But the good news is that with the adjustments we have made, our agents are performing in line with client's targets as they go live. The client moreover has validated this by actually awarding us additional business for several hundred more agents. So in all, we continue to feel confident about the opportunities ahead.

And our strategic differentiation around full customer life cycle offerings is being validated in the marketplace. As a result, we are seeing strong activity across our mix of vertical markets. Although the buying pattern spans this spectrum, it can then be broadly categorized into four groups. In the first group, we have legacy clients that are starting out with large 1,000 plus seat awards.

In the second group, our legacy clients that are starting with pilot programs. However, these programs had considerable potential growth given the significance of their customer engagement operations. In the third group are opportunities with emerging brands that have had significant success in the marketplace, but they are having to play catch-up with their customer engagement strategies. These companies are awarding large contracts right out of the gate.

And finally, and the fourth group, some emerging brands are creating opportunities that are initially small, but have nice growth potential as final market demand for their services and/or products materializes. Meanwhile, operationally, we believe the actions we have taken position us well to absorb this demand across our embedded infrastructure and to continue increasing our capacity utilization, which will enhance our operating margins. So in short, as the year comes to a close, the noise from our revenue growth will fade as the the 2020 underlying demand picture continues to come into play. And with that, I'd like to hand the call over to John Chapman.

John?

John Chapman -- Chief Financial Officer

Thank you, Chuck. Let me turn to our quarterly financial 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. Let's start with the revenues.

In the quarter, we've reported revenues of $397.5 million versus our third-quarter outlook of $400 million to $405 million. This is $5 million below midpoint of our business outlook. [Inaudible] $5 million delta, roughly $3.5 million was due mostly to low revenues from our once largest client, with the remainder a function of foreign exchange fluctuation. Looking at revenues on a year-over-year comparable basis, we were down 0.4% on a reported basis but up 0.7% on a constant-currency basis.

By vertical market and a constant-currency basis, healthcare was up around 17%, transportation ledger up 12%, financial services up 9%, and technology up 8%, all of which was partially offset by the communications vertical down 17.5% and the other vertical down 2%. In the other vertical, we've a couple of programs in the education and energy space that were down. Third-quarter 2019 income from operations increased 71% to $20.47 million for the -- with the operating margin that increased 6.2% from 3.6% for the comparable period last year. On a non-GAAP basis, which excludes the impact of acquisition-related intangibles and fixed-asset write-ups, the America's restructuring as well as merger instigation costs, third-quarter operating margin was 7.9% versus 7.4% in the same period last year.

The increase in the comparable operating margins was primarily due to benefits of the capacity of rationalization action, which tailed off toward the first half of 2019 and improved operational performance. We delivered strong comparable operating margin performance in the quarter despite costs as outlined in the prior quarter's earnings release related to longer-than-expected ramps because of wins with clients who are new adopters to outsourcing and those whose programs have a higher level of complexity and speed to competency. Third-quarter 2019 diluted earnings per share were $0.44 versus $0.33 in the same period last year due to aforementioned reasons coupled with lower share count, which provided a $0.01 benefit. On a non-GAAP basis, third-quarter 2019 diluted earnings per share were $0.56 versus $0.59 on a comparable basis.

The decrease in the diluted earnings per share on a comparable basis was a function of a higher effective tax rate of $0.05 per share coupled with higher other expenses of roughly $0.02 per share for the same period last year, partially offset by $0.01 of lower share count. Relative to the business outlook range of $0.45 to $0.48 per diluted earnings per share, the $0.09 per diluted share outperformance relative to the midpoint was mostly driven by operations. Turning to client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 43% of total revenues, down from 44% from the year-ago period due principally to decline in one of our largest clients.

We had no 10% client in the quarter versus one at the 11% in the year-ago period, driven mostly by lower demand by clients in the communications vertical. Now let's turn to select cash flow and balance sheet items. During the quarter, capital expenditures were down 2% of revenues -- down 2.2% of revenues from 2.7% in the year-ago period. The reduction in capital intensity is largely timing relief coupled with a focus on driving utilization of existing capacity and assets.

Trade DSOs on a consolidated basis for the third quarter was $77 million, up 2 days comparably and unchanged sequentially. The DSO was split between 76 days for the Americas and 81 days for EMEA. We collected roughly 5 days' worth of DSOs within the first -- with a few days from quarter end. Our balance sheet, as at 30 September 2019, remains strong with cash and cash equivalents of $142.6 million, of which approximately 88.9% or $126.8 million was held in international operations, and the majority of which would not be subject to additional taxes if repatriated to the U.S.

During the quarter, we repurchased approximately 369,000 shares at an average price of $27.34 per share for a total of roughly $10.1 million. We have roughly 3.6 million shares remaining under a 10 million repurchase authorized in August 2011 and amended in March 2016. At the 30th of September, we had $77 million in borrowings outstanding, down $15 million sequentially, under a $500 million credit agreement. We continue to hedge some of our foreign exchange exposure.

For the fourth quarter, we've hedged approximately 60% of weighted average rate of PHP 52.81 to the dollar. In addition, our Costa Rica colon exposure for the fourth quarter is hedged approximately 57% at a weighted average rate of roughly CRC 603.23 to the dollar. Now let's turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended the third quarter with approximately 47,500 seats, down approximately 2,100 seats comparably.

Almost all of the comparable reduction related to the capacity rationalization actions. The third-quarter seat count can be broken down to 39,700 in the Americas and 7,800 in EMEA. Utilization rates at the end of the third quarter of 2019 were 73% for the Americas region, 75% for EMEA versus 69% for Americas and 76% for EMEA in the year-ago quarter. The increase in the Americas utilization was driven by capacity rationalization, while a reduction in EMEA was due to expansion in utilization of our at-home platform as a complement to our brick-and-mortar facilities.

The capacity utilization rate on a combined basis was 73% versus 70% in the year-ago period, with increases mainly due to a combination of previously stated factors. Now let's turn to the business outlook. We delivered healthy operating performance in the third quarter. Underlying demand remained consistent with strong trends highlighted in the second quarter.

In fact, based on the opportunities we see across our vertical mix, we are increasingly confident with the current consensus revenue projections for 2020 despite the revision of revenues for the remainder of 2019. Moreover, even with this updated revenue revision for 2019, an applied income from operations and operating margin is projected to be higher than what was implied in our previous outlook in July due to strong operational performance. Second, the downward revision in revenue and diluted earnings per share for the balance of 2019 relative to the midpoint in the prior outlook provided in July are approximately $22 million and approximately $0.03 net, respectively. The driver of revenue change is split roughly equally among foreign exchange volatility, lower revenues from a once-largest telecommunications client and elongate ramps.

So while the approximate $0.04 diluted earnings per share impact is primarily a function of higher effective tax rate than previously forecast, it is partially offset by a $0.01 benefit from lower interest expenses relative to the prior forecast. Third, our revenues and earnings per share assumptions for the fourth quarter and full year 2019 are based on foreign exchange rates as of October 2019. Further volatility in foreign exchange rates between U.S. dollar and the functional currencies 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 the business outlook for fourth quarter and full year.

Fourth, we anticipate total other interest income expense net of approximately $1 million for the fourth quarter and $3.8 million for the full year. The full year 2019 amount is lower than previously guided due to lower average debt balance and lower interest rate. The amount in the other interest income expense net, however, excludes the potential impact of any foreign exchange gains and losses. And finally, our full-year 2019 effective tax rate is expected to be slightly higher than previously forecasted due largely to a shift in the mix of earnings to higher tax rate jurisdictions.

Considering the above factors, we anticipate the following financial results for the 3 months ending December 31, 2019: Revenues in the range of $450 million to $420 million; an effective tax rate of approximately 27%, both GAAP and non-GAAP; fully diluted share count of 41.3 million; diluted earnings per share of approximately $0.54 to $0.58; non-GAAP diluted earnings per share in the range of $0.64 to $0.68; and CapEx in the range of $13 million to $16 million. For the 12 months ending 31st December 2019, we anticipate the following financial results: Revenues in the range of 1.6 to -- $1.604 billion to $1.609 billion; an effective tax rate, both GAAP and non-GAAP, of 25%; fully diluted share count of approximately 41.8 million; diluted earnings per share of approximately $1.52 to $1.56; non-GAAP diluted earnings per share in the range of $2.07 to $2.11; and capital expenditures in the range of $37 million to $40 million. With that, we'd like to open the call up for questions. Judith?

Questions & Answers:

Operator

[Operator instructions] The first question is from Josh Vogel with Sidoti. Please go ahead.

Josh Vogel -- Sidoti and Company -- Analyst

Thank you. Good morning, Chuck and John.

Chuck Sykes -- President and Chief Executive Officer

Hey, Josh.

Josh Vogel -- Sidoti and Company -- Analyst

I got a couple of questions. First around revenue trends and guidance. And I guess, first, is the communications program that you ramped down, is that complete? And then just kind of curious what would that impact was in your -- built into your Q4 guidance?

John Chapman -- Chief Financial Officer

Yes, that is complete. It completed in July, that client is gone. And -- but it really doesn't have any -- it was projected to be gone by Q4 and is gone by Q4. There's no change there, Josh.

Josh Vogel -- Sidoti and Company -- Analyst

OK. Great. And I know you talked about underlying organic trends, ex AT&T, and you have the commentary around being increasingly confident in that consensus number out there for 2020, which does imply about 5% organic growth. I was just curious what -- with the implied growth rate be ex that terminated program as well as what are your thoughts about the ongoing declines at your largest client when you think about 2020?

John Chapman -- Chief Financial Officer

Well, as you've seen, obviously, AT&T is now significantly under the 10%, and you could see this quarter, we were -- we're at 6.4%. We do see that AT&T continue to drop in Q4. They've got a distinct strategy to the lines of business that we mainly support, a lot of those moving offshore. And so we will see some headwind next year from that.

But we do see, by second half of the year -- we do see that client -- really, we should see a -- we should significantly stabilize. And as we have said, because we won new other telco business, we won't stop to see telco grow, and I will probably -- before AT&T stabilizes, we will start to see the telecom vertical grow because of the -- so, yes -- so as you keep saying, we talk about the underlying growth in the business and AT&T has been a little drag for us and we did disclose the AT&T numbers and we really just want to point out to people how the first half of this year, excluding AT&T, growth rate was really, from a constant currency organic, excluding AT&T, was certainly 0.3%. And if you actually look at -- for Q3, we were actually up at 3.6%. So there has been a change in the growth and the volumes from the clients who have been speaking to you guys that we've been winning starting to offset and more of that decline and that was a growth of 3.6% excluding AT&T in Q3.

And if actually, if you exclude the client, you mentioned the when and the whys, actually it was just about 5% in Q3. So it's that information that really where we see continuing into Q4 and actually slightly accelerating. And it was that, that will give us the confidence to really mention 2020 in our guidance because we know the numbers are out there to actually figure out that underlying growth excluding AT&T as a target range of 4% to 6% now. So really just want to make that clear that that's where we saw the business trending for 2020.

Josh Vogel -- Sidoti and Company -- Analyst

That's very helpful. Thank you. And when we think about client mix, you said your top 10 are 43% of revenue. So ex AT&T, we're looking at a couple of clients that are in and around 3% and 4%.

I was just curious when we look at that base, are any of those client contracts coming up for renewal that -- or you're in negotiations with where you think they may not meet your objectives or targets and may result in similar actions to that communications program we saw in Q2?

John Chapman -- Chief Financial Officer

No. I mean we're going to have very little telecommunications clients that are delivered from the U.S. and that was really the issue we had. We had that mix combined with some clients that maybe were not doing as well in the market that's given us issues.

If we think about underperforming accounts, we've got 300 clients, Josh. I mean it must be 1,000 lines of business. And any portfolio, you'll know you've got under and overperformers. But as you stand here today and we look at this material clients that we have, we don't see any of those that are distressed in the way that we spoke about our largest client was and we spoke about the other telco was.

So yes, we've got accounts that we're constantly working on to improve. We've got some accounts that are doing better than where we need them to be, as you'd expect in any portfolio. But as I look at top 10, I don't see any of those clients in this basket of -- that you're describing there as being up for renewal and accounts that we're willing to walk away from.

Josh Vogel -- Sidoti and Company -- Analyst

OK. Thank you. And just shifting gears a little bit. You appear to be seeing nice traction with some of your digital offerings.

I guess, first, I'm curious as to what your definition of digital is? And then with regard to this business, how big is it today? What is your growth expectation that's built into that 4% to 6% number for 2020? And also, can you just remind us what the margin profile looks like versus the legacy operations?

Chuck Sykes -- President and Chief Executive Officer

Yes, it's kind of -- Josh, it's kind of hard to think about how do you define a digital transformation? But for the most part, if you think about digital, you typically always think about the RPA tools, the artificial intelligence tools. You will hear a lot about blockchain terminology and things out there. So chat bots, knowledge bots, so forth and so on. So in essence, it's basically companies that are trying to apply these new technologies to find new ways to modernize their operating model for really the sole purpose of taking their operational performance to a new threshold that they've never done before, and at the same time, just trying to increase the customer experience.

It is a hard thing. We had this conversation inside as well. All I can tell you is when you show up today in our marketplace, if you don't have the ability to talk to clients about how to create a more seamless customer experience for their customers, help them optimize and modernize their operations using these technologies that we all read about, you're just viewed as basically a legacy call center outsourcer. And they want a company that they can grow with because the average relationship last 10 years and they may not purchase those capabilities on day one, but they want to make sure that you can help them figure out how to apply these new technologies to modernize what it is that they do.

That's, in general, the explanation I can really provide to help with that.

John Chapman -- Chief Financial Officer

Yes. And Chuck is talking about how people are using the new digital techniques to improve the agent performance. I'm not sure if you were also asking how much of our transactions that we do today are digital, i.e., nonvoice. And so if you're talking about the way we deliver our services for clients to the consumers, how much is nonvoice, and that's what we call digital.

We're still 80% voice, and that's still the killer app. As we've always said -- we keep saying about the business is those voice transactions are becoming more complex. I think we've referred to that in some of the ramps in terms of the complexity. The ramps, the time it takes for an agent to become completely competent, that's increasing.

That then makes these tools that Chuck's talking about how to simplify these transactions for agents and allow them to be focused on the customer experience to allow the agents to be efficient in how they deliver the service. So the two are slightly different, but they're kind of connected. So I just wanted to make sure we answered both potential questions you had there.

Chuck Sykes -- President and Chief Executive Officer

Yes.

Josh Vogel -- Sidoti and Company -- Analyst

Great. That's helpful. I'll jump back in the queue. Thanks, guys.

Chuck Sykes -- President and Chief Executive Officer

OK. Thanks.

Operator

The next question is from Bill Warmington with Wells Fargo Securities. Please go ahead.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

[Audio gap] I want to ask --

John Chapman -- Chief Financial Officer

Hey, Bill?

Operator

Just a second for the next question.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

Yes. Can you hear me?

John Chapman -- Chief Financial Officer

Yes, we can now.

Chuck Sykes -- President and Chief Executive Officer

Yes, we can now. Perfect.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

OK. Sorry about that. I want to start off -- this is Bill DiJohnson on for Bill Warmington.

Chuck Sykes -- President and Chief Executive Officer

OK.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

Yes. Sorry if I missed this, but what was the contribution from Symphony this quarter?

John Chapman -- Chief Financial Officer

We don't really disclose Symphony separate. It's small. It's -- yes.

Chuck Sykes -- President and Chief Executive Officer

Less than 5%.

John Chapman -- Chief Financial Officer

It's less than 5%, Bill.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

OK, perfect. And then I want to ask, just kind of stepping back. Over the past two to three years, we've seen a pretty big change in vertical mix, partly because of AT&T and its impact on communications. But I was wondering what do you think the optimal vertical mix is for SYKES? Or where do you think the mix will be in, say, five years?

John Chapman -- Chief Financial Officer

Optimal vertical mix, we would look at the market and the available market, and we would like to be -- have a balanced portfolio versus the people that outsource in our business. And if you look at that, we were over-indexed in telecom. And if you look at in terms of where we delivered that telecom from, we were over-indexed in delivering telecom from a domestic delivery. We don't really look at beyond that.

We want to make sure that we've got a balanced portfolio. We want to make sure that we don't have any one client that's dominant, whether that be in a specific vertical or this company as a whole. We do think we'd like to be bigger in health. If you look at our percentage of revenues versus the available market, that's where we still are behind.

And we did do a press release on Cigna. We see ourselves as we simplified and focused the sales team that we'll get traction there. But as we stand today, telco has come down, but that's fine. I think we want it to be a significant piece of our business.

We want it delivered from the appropriate geo. And we'd like, if we look at proportion of the business, we'd like definitely for health to be more and we don't really want a client to be above 10% of our revenues. And that's, I guess, the benefit of where we are today. It's not great that we've had these significant reductions in our largest client, but we want to make sure that we don't kind of get ourselves like that again, and that's what we're focused on, not so much the specific vertical mix.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

OK, that makes sense. And then one last question from me. I was curious on the new capex guidance. Looks like it's being reduced by up to 20%, which I think would put it at the lowest level since 2012.

What should we read into from this? Is it timing?

John Chapman -- Chief Financial Officer

Yes. What I would say do not read into is that if we are growing at 4% to 6%, the capex as a percentage of revenues changed. I mean we've always said we want to really focus on existing capacity, really be diligent in our capex spend, make sure that we drew in the sites that we had. And I think you're really just seeing the impact of that in the capex number this year.

Next year, I'm still hopeful we could be under the 3.5% of revenues, even with, say, a 5% growth because we still got existing capacity to grow into. But what I would say is I wouldn't model that all of a sudden we are significantly less capital intensive. Although we always want to try and be around that 3% to 3.5% versus above that, I think this year's been at 2.5% is our projection and 2% year to date. That's at the low end.

But yes, we're just watching what we do in terms of trying to make sure that we utilize the capacity that have and grow into it because we know, in terms of our operating margins, and that's how we're going to improve the operating margin overall percentage. It's getting that utilization number back up into that 80-something percent.

Bill DiJohnson -- Wells Fargo Securities -- Analyst

Thank you so much.

Chuck Sykes -- President and Chief Executive Officer

Thanks.

John Chapman -- Chief Financial Officer

Thanks.

Operator

The next question is from Dave Koning with Baird. Please go ahead.

Dave Koning -- Robert W. Baird and Company -- Analyst

Hey, guys. Thanks. Nice job.

Chuck Sykes -- President and Chief Executive Officer

Hey, David.

John Chapman -- Chief Financial Officer

Thanks.

Dave Koning -- Robert W. Baird and Company -- Analyst

Yes. And I guess, first off, when we think about next year, and you talked about kind of that mid- single-digit growth, when we think of this year first, EMEA is growing really well because of Symphony and the good core growth too, and Americas, obviously, is declining a little bit just because of the AT&T and stuff. But next year, as AT&T headwinds kind of subside, Symphony anniversaries and stuff, should we see both of those divisions both growing kind of in that mid-single digits?

John Chapman -- Chief Financial Officer

Well, you want us to guide by saying -- I don't -- yes, I mean I suspect you're probably right, David. Without really giving guidance, I think we want all of our business units to be growing at about 5%. And you're right, EMEA looks like it's doing significantly bad without Symphony, and we'd expect that to average back down. Our operating margins in EMEA have been doing well.

So, again, some of that is Symphony and some of that is just the core business. But yes, I mean I suspect you're right. But we'll get to that when we get to the next quarter.

Dave Koning -- Robert W. Baird and Company -- Analyst

Yes. No, that's fair. And I guess the other question is a little bit like that too. Margin expansion this year has been so good between probably Symphony between some of just the core utilization.

Is that pace sustainable? As you start to grow, do wage rates start to pick up, investment rates start to pick up a little? It just becomes harder to expand by as much as your growth picks up.

John Chapman -- Chief Financial Officer

We're -- there is a little bit of wage inflation in some of the geographies that we're ramping in, but no, not like the crazy stuff that we saw in the U.S. that kind of derailed us. And the value proposition offshore and nearshore is now bigger than I think it's ever been in terms of that -- the disparity. I forgot what you asked me, David.

Dave Koning -- Robert W. Baird and Company -- Analyst

Yes, just -- well, really just --

Chuck Sykes -- President and Chief Executive Officer

The ramps of margin, yes. A big part with the margins, David, too is just the -- it really shows you just how challenging these domestic programs were in the communications sector. And we don't get into how much detail what we're guiding, but I think, yes, everyone's seeing that now because our capacity utilization didn't jump up by a tremendous amount, but our margins have. So those domestic-based communication programs where we're struggling now quite a bit.

John Chapman -- Chief Financial Officer

And we're still, as we know -- we will target 8% to 10%, David. We're still trying to get in that range. And we know the biggest lever we've got now is utilization. If we can fill the capacity that we've got available, that's going to be the best thing we can do.

But you're also right that as you ramp these programs, especially, I mean these ramps will go in at Q1 next year, that will have a little bit of a headwind on our margins. And we're not guiding and we don't want to get that because there are so many factors need to build into our operating margin guidance. But I think it's worth talking about how that will have -- that will drag until it's, let's call it, normalized, and it gets rougher than Q4 and that will continue in Q1.

Dave Koning -- Robert W. Baird and Company -- Analyst

Yes. All right. Well, thanks for all that.

Chuck Sykes -- President and Chief Executive Officer

Yes.

John Chapman -- Chief Financial Officer

Thank you.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sykes for any closing remarks. Excuse me, there is a question.

Excuse me, in the last minute, there is Vincent Colicchio of Barrington Research, who has just registered for a question. Please go ahead.

Vincent Colicchio -- Barrington Research Associates -- Analyst

Yes. I have a couple of questions, Chuck, but the important question is I hope your illness is not contagious to John.

Chuck Sykes -- President and Chief Executive Officer

No, I don't think it is to John, but I think Subhaash is struggling here a little bit.

Vincent Colicchio -- Barrington Research Associates -- Analyst

That's not good either but OK. So I apologize if I missed it, I don't think I did. The size of the elongated ramps and what verticals they're in? And when will they be fully ramped?

John Chapman -- Chief Financial Officer

Well, we spoke about ramps being both insurance and one being telco, and the largest one is the telco ramp. I mean we've got a significant telco ramp into 1,200 kind of seat size. It's very significant. And that will continue into Q1 next year, Vince.

That's the majority of the -- well, that's the most significant one there.

Vincent Colicchio -- Barrington Research Associates -- Analyst

And then, Chuck, John talked a little bit about the portfolio mix, how you like to play out. Financial services has become pretty substantial. How comfortable are you with it at that level right now?

Chuck Sykes -- President and Chief Executive Officer

Yes. No, we are comfortable with it, Vince. I mean typically if you look at the industry reports, communications just as a total industry across the world is the largest sector. I think it's around 30%, 40% of the total industry, and communications is now about right around 32%, 33%, so we kind of like to see our business map the industry concentration, if you will.

And as John said, the bigger issue is really client concentration. But the one thing I would add about the portfolio that's a little different now than it was in the past is that we're also looking at each industry and we're asking ourselves how is the mix coming from what we consider traditional or in my words, I was using the word legacy, but more of the traditional companies. And the reason why that's important is because the growth in a lot of that traditional business is, just as they build business themselves, they're not growing rapidly and many of them are just now beginning to outsource. And candidly, through automation, many of them are able to reduce the contact rates per customer because they're large and mature.

So we can help them with that, and there's a lot of growth there for us, but we also want to make sure that we're going after the so-called new economy companies. So in financial services, it's Fintech. If you're looking in communications, media is one of the new content providers and the people -- we want to go after. In technology, that continues to just grow, in general, overall, but that's important because the wages are good, they're willing to pay and support pricing domestically that will support the wages and all, and as companies themselves still growing very, very rapidly.

So we just -- we really want to have a more healthy base there, so -- because some of the new business from new economy guys will be replacing some of the traditional business that may be declining through automation and that type of stuff. But in general, when you look at the total market with both legacy companies and new economy companies, the total industry that we're in is still growing. And so you've got to be smart in the way that you're placed in that market. So that's what's on our minds today.

But still, to John's comment when he responded to the previous question, No. 1 is client concentration. It just isn't good to have -- get up to the 17% of your business like we were and put us in a tough spot.

Vincent Colicchio -- Barrington Research Associates -- Analyst

And how big is Clearlink today? And how fast is it growing? And may -- and any comments you might have on sort of its place in your portfolio?

John Chapman -- Chief Financial Officer

Yes, you keep asking this Vincent. And we keep telling you [Inaudible]

Vincent Colicchio -- Barrington Research Associates -- Analyst

Well, I got to try.

John Chapman -- Chief Financial Officer

And yes, we -- I mean, we kept talking about how Clearlink was growing substantially above, and we've spoken about this year, it's kind of not the same this year because we've got -- we spoke about the P&C insurance that we kind of have got nice growth in terms of revenue last year, but we pulled back on that because we really didn't see a route to the kind of operating margins that we expect from the business. So that gives us some headwinds this year. We also had our -- and if you will listen to my -- if you see that my script, we talked about an energy client, that was really a Clearlink energy client where we've kind of unwind that relationship. It's really, let's call it, a struggling client, that the issue is there.

So not the same it was, and our long-term projections for the business is not different. Just this year, we're kind of just adjusting the portfolio and some kind of losses that we didn't project, which is the energy one. So we don't -- we're not any less or more positive than we were of the business. But definitely, the trajectory is less than it had been in the prior years.

Vincent Colicchio -- Barrington Research Associates -- Analyst

OK. That's it for me. Thanks, guys.

Chuck Sykes -- President and Chief Executive Officer

All right. Thanks, man.

Operator

The next question is a follow-up from Josh Vogel with Sidoti. Please go ahead.

Josh Vogel -- Sidoti and Company -- Analyst

Thank you. Just one more here. I'm curious, when you do sit with prospects and have those discussions around modernization and optimization, do you find that there are any gaps in your digital transformation business? And with that in mind, what does the landscape look like today out there and what's your appetite for deals to maybe expand your portfolio on that front? Thank you.

Chuck Sykes -- President and Chief Executive Officer

Josh, I wouldn't say -- I mean we do have some small gaps in areas that we want to plug in. But in general, the capabilities that we've assembled now with Clearlink and marketing, with the investment we do with XSELL, with the artificial intelligence and some partnerships we have, and now with the robotic process automation, we have capabilities that really makes us competitive. And we have -- we can really give a very compelling story with those capabilities that we have. The challenge that we have, but it's not so much the capabilities, is that these businesses are really so different from our core traditional call center operation, which is very human capital intensive, is that we've got to continue showing up in the market with a more integrated suite, which is one of the reasons why we don't really want to start breaking out how big Clearlink is and Symphony is because what we want to show up as in the marketplace, which we're beginning to do better now, is a true end-to-end customer engagement provider.

Then when we say customer engagement, it isn't just doing full end-to-end customer service or full customer end-to-end sales. It's truly marketing sales and service. And I think we were maybe a tad ahead of the market to some extent when we first started talking about that, but more and more clients today are thinking that way. So they're not just trying to optimize the way they currently operate, which may just be going offshore.

They're not just trying to modernize using the latest tools and technologies to find new levels of performance threshold and improve the experience. They also want to create an integrated and seamless experience across marketing, sales and service. So I think our capabilities are at a great place. What's our challenge right now is just the way we show up in the market and making sure that we deliver in an integrated fashion.

That -- that's what is really the biggest challenge right now. And that's what I think in the last six months -- yes, the last six months, Josh, I think, part of the reason that's given us a lot of excitement. You can sit around the table all day long and talk about this stuff, but until you get in the marketplace that you really don't know. And in the last six months, we've just had really good affirmation in the marketplace that our story and our capabilities is resonating.

So that's a good place to me.

Josh Vogel -- Sidoti and Company -- Analyst

Yes. Well, thanks again, guys.

Chuck Sykes -- President and Chief Executive Officer

All right, buddy. Thanks, Josh.

John Chapman -- Chief Financial Officer

Thanks, Josh.

Operator

So this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sykes for any closing remarks.

Chuck Sykes -- President and Chief Executive Officer

OK. Well, thanks, Judith. And no closing remarks. As always, thanks for your participation in the call, and we look forward to speaking with you next quarter.

Have a good day.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Chuck Sykes -- President and Chief Executive Officer

John Chapman -- Chief Financial Officer

Josh Vogel -- Sidoti and Company -- Analyst

Bill DiJohnson -- Wells Fargo Securities -- Analyst

Dave Koning -- Robert W. Baird and Company -- Analyst

Vincent Colicchio -- Barrington Research Associates -- Analyst

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