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Sykes Enterprises Inc (NASDAQ:SYKE)Q4 2018 Earnings Conference CallFeb. 26, 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, Inc's Fourth Quarter 2018 Financial Results Conference Call and Webcast.
All participants will be in listen-only mode. (Operator Instructions) Please note that today's call 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 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.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Thank you, Debbie, and good morning, everyone and thank you for joining us today to discuss Sykes Enterprises' fourth quarter of 2018 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 try to get through my comments with my allergies that I have you can probably tell with my voice that I'm struggling, but I'll do the best that I can and make our remarks here about the quarter and I'll turn the call over to to John.
Overall, I'm extremely encouraged by the operating and financial performance in the final quarter of the year. We did what we said we were going to do. This gives us greater confidence that we are on a much better footing, exiting 2018 as highlighted by our solid 2019 outlook. The main headwind in 2018 was the operating challenges in the U.S., which are a combination of various factors going back to 2016. As we have stated before, the timing of capacity additions in the U.S. coinciding with the tightening labor market, that really gained steam in the 2017, 2018 period was pressuring our operating margins.
The good news is, thanks in large part to our capacity rationalization actions, we have actively begun to turn the trajectory of our margin profile. The most tangible example of that success was our operating margin in the fourth quarter of 2018, we were up on a comparable basis to 9% from 7.2% in the fourth quarter of 2018 from the same period last year. This margin expansion came directly as a result of rationalizing roughly 5,000 seats, which was almost 10% of the capacity.
We believe we have further opportunities in capacity rationalization, but this will more likely be incremental in scope. All of this sets up well for 2019, based on the outlook we provided, which reflects some of the benefits from another 100 basis points of margin improvement to kick in in the second half of this year. The key to 2019, however, will be driving revenue growth across our base of existing seat capacity. Due to our differentiated portfolio of full lifecycle capabilities which span digital marketing sales and service with RPA and AI underpinning them, we are even better positioned to proactively engage the marketplace.
In fact, we have good momentum with the sales funnel across new and existing logos. We are seeing demand across virtually the whole vertical markets complex, including financial services and communications. These vertical should complement the double-digit growth momentum already in healthcare, retail and travel. The client profile varies as well, ranging from first=time outsourcers to those that are increasing their allocation to outsourcing as well as to those that are diversifying their base of providers, given the consolidation that has taken place in the industry.
In addition, we are opportunistically exploring joint pitches with Symphony, our industry-leading RPA experts. Although it is early days, we are encouraged by the favorable reception we are getting about our joint capabilities. In fact, we could be on the coast of winning what potentially could become a significant healthcare opportunity where Symphony played a nice supporting role. We believe the evolution in our capabilities to full lifecycle customer engagement services really puts us in a formidable spot as we simultaneously address some of the recruitment retention and pricing challenges in the U.S.
In summary, as our action plans continue to gain traction, we are encouraged by the pace of revenue and margin opportunities in 2019. Although the macro backdrop could surprise us, given our strong balance sheet that has given us the flexibility to reinvest in our business organically and inorganically, we are better positioned to capitalize on opportunities and whether the headwinds that come our way.
And with that, I'd like to hand the call over to John Chapman. John?
John Chapman -- Executive vice president, Chief Financial Officer
Thank you, Chuck, and good morning, everyone.
On today's call, I'll focus my comments in the fourth quarter results, particularly key P&L, cash flow and balance sheet highlights. After which I'll turn to the outlook for the first quarter and full year.
Let's start with revenues. In the quarter, we reported revenues of $415.2 million versus our fourth quarter outlook of $415 million to $420 million. Excluding the $2.8 million in impact from foreign exchange fluctuations in the quarter, we would have reported revenues slightly above the midpoint of our fourth quarter outlook. Looking at revenues on a year-over-year comparable basis, we were down 1% on a reported basis and up 0.6% on a constant currency basis.
By vertical market and on a constant-currency basis, healthcare was up around 46%; others, which includes retail, up 24%; transportation and leisure, up 22%; technology, up 5%; all of which were partially offset by the communications and financial services vertical down 17% and 3% respectively. It is worth noting that excluding the impact of the previously disclosed strategic decision to discontinue the program, the financial services vertical would have been up around 3% on a constant currency basis.
Fourth quarter 2018 operating margin increased to 6.7% from 5.6% for the comparable period last year. On a non-GAAP basis, which excludes the impact of acquisition related intangibles and fixed asset write-ups, charges and merger and integration costs, fourth quarter 2018 operating margin was 9% versus 7.2% in the same period last year. The increase in the comparable operating margins was due primarily to actions related to capacity rationalization, coupled with an improvement in the mix of business in the U.S.
In addition, the fourth quarter 2018 operating margins reflected a recognition of a $1.4 million benefit or 30 basis points associated with our mark-to-market adjustment of stock-based deferred comp programs funded through the Rabbi Trust investments, which was impacted by the Q4 2018 decline in global financial markets.
Fourth quarter 2018 diluted earnings per share were $0.40 versus a loss of $0.41 in the same period last year, with the loss in the year-ago period due chiefly to a one-time transition tax on undistributed foreign earnings related to the passage in December '17 of the Tax Cut and Jobs Act. On a non-GAAP basis, fourth quarter 2018 diluted earnings per share were $0.58 versus $0.47 on a comparable basis. The increase in the diluted earnings per share was due to actions taken around capacity rationalization relative to the diluted earnings per share of $0.65 to $0.69 as projected in the Company's November 5th business outlook. Fourth quarter 2018 diluted earnings per share would have been at the top end of the range when adjusted for interest and other expense, which had a $0.04 impact and the tax rate, which had a $0.07 impact.
Turning to our client mix for a moment. On a consolidated basis, our top 10 clients represented approximately 41% of total revenues during the fourth quarter, down from 45% from the year-ago period, due principally to the decline in one of our largest clients. We had no 10% client in the quarter versus one at 11.1% in the year-ago period, driven mostly by lower demand by clients in the communications vertical.
Now let me turn to select cash flow and balance sheet items. During the quarter, capital expenditures were down 2.4% of revenues from 3.6% of revenues in the year-ago period. Trade DSO, on a consolidated basis for the fourth quarter were 76 days, up two days on a compatible basis. The DSO was split between 74 days for the Americas region and 81 days for EMEA. We collected roughly five days worth of DSO within the first few years of the year-end -- excuse me, first few days after the year-end.
Our balance sheet at 31st December 2018 remained strong with cash and cash equivalents of $128.7 million of which approximately 89.9% or $115.7 million was held in international operations. During the year, we paid down $173 million of debt, partially funding through internally generated cash flows, the acquisitions of Symphony and WhistleOut.
At December 31st, 2018, with $102 million in borrowings outstanding with $338 million available under our $440 million credit facility, which was subsequently increased to $500 million. We continue to hedge some of our foreign exchange exposure. For the first quarter and full year of 2019, we have hedged approximately 67% and 40% at a weighted average rate of PHP53.16 and PHP53.7 to U.S. dollar respectively. In addition, our Costa Rica colon exposure first quarter and full-year are hedged approximately 81% and 60% at weighted average rates of roughly CRC585.96 and CRC593.13 to the U.S. dollar.
Now let's turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended fourth quarter with approximately 48,800 seats, down 3,800 seats comparably. The Company rationalized roughly 5000 traditional brick and mortar seats in North America on a year-over-year basis, which was partially offset by seat additions internationally for demand. The fourth quarter seat count can be further broken down to 41,200 in the Americas and 7,600 in the EMEA region.
Capacity utilization rates at the end of the fourth quarter of 2018 was 70% for the Americas region and 75% for the EMEA region, versus 71% for the Americas and 81% for EMEA in the year-ago quarter. The decrease in the Americas utilization was driven mostly by lower demand in the communications vertical while the reduction in EMEA was due to expansion and utilization of our at-home platform as a complement to our brick and mortar facilities. The capacity utilization rate on a combined basis is 71% versus 72% in the prior year-ago period, with the decline mainly due to a combination of previously stated factors.
Now, let's turn to business outlook. We are encouraged by the initial indications of demand. This demand spans virtually all our vertical markets and is being fueled by both existing and new clients. The benefit from the demand should lead to comparable revenue growth in the second half of 2019 driven by ramps in the first half of the year. Revenue growth in 2019 reflects foreign exchange headwinds of $20 million or approximately 1%. Deploying this demand across that existing capacity in combination with savings from the capacity rationalization actions taken in 2018, additional benefits from incremental rationalization in 2019 and improved operational efficiencies should aid operating margin expansion in 2019 relative to 2018.
Our revenues and earnings per share assumptions for the first quarter and full-year are based on foreign exchange rates as of February 2019. Therefore, the continued volatility in foreign exchange rates between the 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 the first quarter and full year.
It is important to point out that the revenue growth in 2019 compared to 2018 reflects foreign exchange headwind of $20 million or 1% of full year growth rate, with roughly $10 million or approximately 2.5% of that impact expected in the first quarter of 2019. We anticipate total other interest income expense net of approximately $1.2 million for the first quarter and $4.8 million for the full year. The amount in the other interest -- income expense, exclude potential impact of any foreign exchange gains or losses. We expect an increase in full year 2019 effective tax rate compared to 2018, largely due to discrete benefits in '18 and expected mix shift of geographic mix of earnings to higher rate tax jurisdictions.
Considering the above factors, we anticipate the following financial results for the three months ending 31st of March, 2019. Revenues in the range of $403 million to $408 million an effective tax rate of 26%, fully diluted share count of approximately $42.3 million, diluted earnings per share of approximately $0.29 to $0.32, non-GAAP diluted earnings per share in the range of $0.42 to $0.45 and capital expenditures in the range of $11 million to $13 million.
For the 12 months ended 31st of December, we anticipate the following financial results. Revenues in the range of $1.656 billion to $1.676 billion, an effective tax rate of approximately 25%, fully diluted share count of approximately $42.3 million, diluted earnings per share of approximately $1.73 to $1.86 and non-GAAP diluted earnings per share in the range of $2.18 to $2.31 and capital expenditures in the range of $45 million to $50 million.
With that, I'd like to open the call for questions. Operator?
Questions and Answers:Operator
We will now begin the question-and-answer session. (Operator Instructions)
The first question comes from William Warmington with Wells Fargo. Please, go ahead.
William Warmington -- Wells Fargo -- Analyst
Good morning, everyone.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Good morning.
John Chapman -- Executive vice president, Chief Financial Officer
Hey, Bill.
William Warmington -- Wells Fargo -- Analyst
So, congratulations on the nice margin performance. A couple of questions for you. First, I was hoping to get a revenue bridge. I know from the -- trying to get to the true constant currency organic revenue growth, I know that you've got some FX in there, we've got some acquisitions with Symphony and WhistleOut. And also that you've got some discontinued programs that wasn't sure if you wanted to back those out forward and backward to try to get to a true apples to apples constant currency revenue growth number.
John Chapman -- Executive vice president, Chief Financial Officer
Yeah. And so, if you look at Q1 first, Bill. So, Q1 constant currency is like flat, but if we can exclude WhistleOut and Symphony, we're really talking about shrinkage of 2.8% year-over-year for Q1. We know that we've got a financial services program. So if you can -- if you stripped that out, then we'd still be shrinking 1.8% and as you know, the bulk of the headwind that we've got is really telco and again if you excluded telco, and our largest client, you'll be looking at a 3% growth.
For the year, it's actually a significantly better than that because constant currency, we're looking at 3.3%. Now excluding WhistleOut and Symphony, you're looking at 1.2% growth, excluding the financial services program that we've spoken about, that's really -- that bridges you to 2.2% and again if you exclude telco, we're kind of close to 5%. So again, excluding the impact of the actions that we took last year for the benefit of the operating margin that you see came through in Q4, all required actions, the rest of the business is still, for '19, we're projecting it to be in that 4% to 6% range in close to the midpoint of it. Hopefully, that will help you kind of bridge that, Bill.
William Warmington -- Wells Fargo -- Analyst
Okay. And then also, if you can apply that math to Q4 that you just reported, just to make sure I --?
John Chapman -- Executive vice president, Chief Financial Officer
In terms of Q4, I mean constant currency, we're plus 0.6%. If you excluded Symphony and WhistleOut, we're kind of down 2%, if you exclude the financial services client, we're effectively flat and if you excluded telco, we'd be somewhere around 2% to 3% growth number. It is very similar to Q1.
William Warmington -- Wells Fargo -- Analyst
Okay. And then I also had a question for you on your bank line. You mentioned that you'd increased the capacity from $440 million to $500 million, it sounds like you have about $100 million outstanding on that now. But I believe the $500 million has a $200 million accordion feature out of two, so it gets you up the $700 million, so roughly $600 million in dry powder, that's a lot of money. You guys thinking about doing some sort of a transformational deal sometime in the near future?
John Chapman -- Executive vice president, Chief Financial Officer
No, I mean in terms of the context of facility, Bill, I mean, a facility (inaudible) less than a year ago in May, the market is good. We decided to basically get the refi done now. We were very appreciative of the support from our partner banks, really pleased by effectively improved terms in terms of costs that we're able to secure. And we do know that for an exercise, we have got very supportive, very strong bank group that I am sure would support us if any material acquisition opportunity came about, but that's not the reason we did it. We did it because -- not to become (inaudible) the market was good, our partners were showing us some really nice strength and we took the -- we took the option to up to -- up it to $500, with as you say, the accordion there increase if we need it, so.
William Warmington -- Wells Fargo -- Analyst
Got it. Okay. And then one more question for you on the rationalization of capacity, which you talked about a lot. I Just wanted to understand which verticals and geographies are the ones that have been the most impacted by the rationalization?
John Chapman -- Executive vice president, Chief Financial Officer
Well, in terms of 2018, it was really North America as you spoke about was everything. And in terms of the little pieces that we're still looking at that we might want to touch on that we kind of (inaudible) in our prepared remarks. Again, it's mainly -- it's North America. We have a few areas that we're looking up, but you're talking about a very -- compared to 2018, we're talking about really small scale though. We just know that and we've already said, the U.S. was holding us back over 200 basis points, we've got 100 basis point of that back, we improved -- most of the improvement in Q4 was related to those actions and we still got 100 basis points to get, most of that's going to come through filling the capacity in the second half of the year. But we also said there was still a 30 basis points of headwind and we still need to work on in the U.S., and that's what we're touching on there in terms of the incremental aspects, so.
William Warmington -- Wells Fargo -- Analyst
Great. All right, well, thank you very much.
John Chapman -- Executive vice president, Chief Financial Officer
Okay.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Thanks, Bill.
Operator
The next question comes from Dave Koning with Baird. Please go ahead.
David Koning -- Baird -- Analyst
Yeah. Hey, guys. Thank you. And I guess my question is a little bit like the past question, we've had a decline in centers and I know that the reason or that the kind of decline in seat capacity given the rationalization and trying to get -- get the margins, right. How much more like -- are we close to a stability point in aggregate? And I guess how do we think about revenue per seat going forward? I know it disconnects now with some of the acquisitions you've done, but are we at a point where over the next few years we might continue to have 1%, 2% decline in seat count, but we might actually have revenue per seat growing 4%, 5% because of some of the new services that are like disconnected from seats?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, you're right. I mean, the more revenues we have, whether it be at-home, whether it be, I guess connected with Symphony and all of these, you're absolutely right, Dave, you can get a disconnect (inaudible) communicate that to you guys in terms of the impact of it, but yes, your logic is correct.
David Koning -- Baird -- Analyst
Okay. And should we expect, I guess what are you seeing in the the environment right now just between -- as you've made some of the newer acquisitions, I mean are you just seeing an accelerating pace of clients wanting things different than just the normal voice-to-voice communication and into more of the newer technologies and kind of how do you see that playing out through the revenue over the next couple of years and really through the margins too?
Charles Sykes -- President, Chief Executive Officer & Executive Director
Yeah, I know, David, I'll try to answer with -- my voice isn't hanging in there right now, but if not, I'll turn it over to John. But yeah, we see the business of labor arbitrage is still very strong, very present but clients today definitely are looking for partners that can help them digitally transform. And for us, so much of our story is that we need to continue finding growth coming more from different verticals and getting better distribution of our revenue, so. And the only way to do that is when we show up, we need to have a differentiated offering against entrenched competition because there's -- we've got competitors in every market we're going after.
And we're really encouraged with the growth that we're seeing, I mean the significance of the healthcare and the travel and leisure and we're seeing areas in the e-commerce and things. And these are going to be new and exciting areas for our Company and we're really encouraged by the way that our investment in differentiating or beginning to resonate with the marketplace.
So as we look now within clients, I mean, the digital marketing, all the way through the post sales support is expanding our breadth of services that we can offer to our clients now, which is going to be an important feature for us and then label now or enabled now, if you will, by this intelligent automation platform that too is now going to become another source of growth for us and just to differentiate.
So we're excited about the automation piece. We do see obviously that -- you do see within telco and within financial services, some of our clients basing their forecasts, have been indicating that they think their digital capabilities is reducing contact rates and we know that's present, but we don't see that as the overarching headwind to preventing us from growing the way that we want to grow because we still see so much opportunity in verticals that we really have not been that focused in when we show up with these automation capabilities. We see that as really a big opportunity for us.
So I think the big thing for our Company is we just need to make sure that as we grow going forward, we've got to be smarter than I would say we were in the past, or maybe just in some cases, lucky or unlucky, but in the sense that we got to make sure we're putting the right client programs with the right shore strategy. Serving some of the verticals that we did back in 2016 that we built in the U.S., I mean, it's just -- at that time, given where wages were and how quickly they went up on us, it just created our issue for us, if we would have put them offshore, I think we would have had a whole different story.
So now we're just -- we recognize that and watching client concentration and watching growth coming from other verticals and things is going to be a key part. And that's why I'm so encouraged right now with the numbers that we have, with the way the growth in the other verticals is really pop in nicely. So anyway, long-winding answer, but my voice was working half way, gees, and I figured I'd take advantage of it.
David Koning -- Baird -- Analyst
No, you sounded pretty good there, no thanks for that. And John, just one quick one for you. I'll give Chuck a little bit of a rest here. But the tax rate up pretty meaningfully, is this kind of a normal rate now mid 20%s? I know some of the tax reform impacted it, but maybe just talk about that for a minute?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, I mean I think we knew that 2018 was a kind of, let's call a whole number. We had some discretes in there, what's interesting is if you actually take all the discretes that we benefit from '18, our rate would have been closer to 23%. So we're guiding to 25%, I would say '19 has got couple of items that's probably impacting us by 1 point or 2 points. And so we are looking at our rate kind of bouncing around the 23% to 25% number at the higher end for '19, we've got -- we know why that is, we think it maybe able to drift back down but it's an area, there's still lot's of regulations to be published, lots of uncertainty but as we stand today, I think for the foreseeable future and future years, I think we'll be looking at somewhere around 23% to 25% number, David.
David Koning -- Baird -- Analyst
Got you. Well, thanks guys. Appreciate it.
John Chapman -- Executive vice president, Chief Financial Officer
Thanks.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Thanks.
Operator
The next question is from Josh Vogel with Sidoti & Company. Please go ahead.
Joshua Vogel -- Sidoti & Company -- Analyst
Thank you. Good morning, guys.
John Chapman -- Executive vice president, Chief Financial Officer
Hey, Josh, good morning.
Joshua Vogel -- Sidoti & Company -- Analyst
Chuck, you had some comments around recruitment retention and pricing efforts in the U.S., I was wondering if you could talk to this more -- maybe more about pricing and wages but not only in the U.S., what you're seeing offshore and in Europe, our wages continue to go up, are you having success in passing this along to clients? And while you're on it, maybe just some general commentary around the staffing inefficiencies that you battled within the communications vertical throughout 2018?
Charles Sykes -- President, Chief Executive Officer & Executive Director
Yeah. So Josh, I mean, we're definitely seeing wages continuing to increase and again, depending which vertical that we're serving, I mean that is more pronounced than others. I know it may sound like a super simplistic response but candidly, if we break in and we continue to grow with these new column digital economy companies, they actually, the pricing supports the wages and in that sense it doesn't -- it's not a problem. It helps us with attrition, absenteeism and everything.
But when you get a client that just can't support those wages and we've got them in the wrong delivery, then it just -- it manifests itself to a topic of wage problems. And I think the bigger issue right now for us is we just have to be smarter and really guiding clients based on the pricing that they can afford in their business models. We have to drive them to the delivery model that's going to work for them. So the more that we're able to do that and we do see clients today, I mean, look, they're all dealing with it themselves. So it isn't the topic like it was two years ago, where I think maybe some people were a little bit in denial. I don't think anyone's in denial now and we are seeing more clients now willing to embrace. I think you're going to see our offshoring pick up again because of labor supply.
The other thing is in capacity. I mean, Europe's utilization and facilities, one of the reasons why the numbers as an increase as a percent of brick and mortar facilities is because our home agent model has increased. And we don't count those headcounts against that facility model. So we are now expanding the home agent platform in Europe pretty aggressively and that really is all about this labor supply.
But we do have clients that they -- it's not as much in that case, I'd say the pricing isn't supporting the wages, it's just can we literally find the people at the pace that we need to find them to meet demand. And that's why I think we're going to see home agent continuing to be used quite a bit in the European marketplace. So again, I guess if we were sitting here, I don't know how to illustrate it differently, but wage pressures are only a problem for us if we can't get our clients to pay the price to support the wages, I mean, that may sound like an obvious statement, but I say that because if you talk to some of our peers, depending who they're serving and the country, they've got the right mix. They may not feel was pronounced of a problem as what we do.
And that was a big part of what we just did in 2018. And so now I feel like we're, I think we've got a good alignment and I'd also like, again the client concentration mix, the way that it's changing, I think that will help with volatility and things in the business going forward. We just want to see how well we can hold on to that as long as we can, that good portfolio distribution of revenue.
Joshua Vogel -- Sidoti & Company -- Analyst
Okay. Thank you. Switching to John, you gave a really good breakdown apples in terms of revenue. I guess I wanted to go a little bit further and maybe if you could help quantify for us, with the rationalization last year, how much revenue did you lose from the rationalization? And I guess how much in cost or expenses did you shed during that process as well, I guess on a net basis, the revenue impact and the cost savings?
John Chapman -- Executive vice president, Chief Financial Officer
That's a really difficult one for us to quantify because there was so many things happening and moving in the US. I think if you look at what we've spoken about the telco industry and what we've said about the financial services industry, that's really a revenue headwind as a result of the actions. So we've given you those numbers. In terms of the expenses, well, all I would say is, we were taken action on programs and sites that we did not feel had a long-term place in our portfolio.
And as we've said, the actions have resulted in, I think in the U.S., it's over 130 basis points of improvement in Q4. So I wouldn't get too fixated on overall cost, what I would say is now (inaudible) and look at the revenues we lost, the cost we took out and the impact on the adjusted operating income, it was over 130 basis points improvement year-over-year. So that kind of tells you that (inaudible) really getting rid the programs that we've said, either the clients couldn't pay the wages, allowed us to pay the wages, to allow us to be successful for them on their behalf. And overall, these actions have really improved their operating margin and we still got little way to go, but by and large, all -- most of the heavy lifting has already done.
And so I guess that's how to answer that Josh, it's hard to say how much revenue we had, but most of the telco weakness was related to that rationalization, the financial services client, but it was all done for the benefit of operating income and we've shown the improvements in our Q4. So it's kind of validate what we had to do.
Joshua Vogel -- Sidoti & Company -- Analyst
Okay, thank you. And one last one. I guess, when we look at your guidance, I know there's some FX pressures and program ramps earlier in the year, basically infers that the bulk of the revenue and EPS are going to hit up in the latter half of the year. I guess going on a slight tangent there, if we're in a static environment based on today's outlook, can you maybe share your utilization expectations or targets as the year progresses?
John Chapman -- Executive vice president, Chief Financial Officer
And I don't want to start going into the utilization by quarter. What I would say, as we've spoken about how we've got new clients, and we've spoken about how we've got growth in existing clients, we've spoke about how we are ramping them in the first half of the year, what I would say is in the Americas, our guidance pretty much takes us close to, not quite, close to 80% by the end of the year. It doesn't go up linearly, I would say, you get a bigger improvement in the second half of the year but our guidance really gets us close to that 80%. So, not quite where we want to be, which is 85% that we keep talking about, they're getting much much closer and that's reflected in the margin profile that when we get there, engage for that and you guys will see.
Joshua Vogel -- Sidoti & Company -- Analyst
Great. Well, thank you for taking my questions and good luck with those allergies, Chuck.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Yeah, thanks, Josh.
Operator
The next question comes from Vincent Colicchio with Barrington Research. Please go ahead.
Vincent A. Colicchio -- Barrington Research -- Analyst
Well, this question is for Chuck or John, again, subject to voice conditions, we've got a new metric to use every quarter now. So, what was the growth rate of ClearLink and is it helping, maybe you could talk about -- if it's helping to differentiate yourself in the market today?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, I mean again, Vince, you know this, we don't (multiple speakers) and it's just under the 15%. And if we -- and again, all I'm going to say is -- in terms of revenue. In terms of growth, it's still double-digit. So it's helping, but that's what we wanted. So, yes, I mean, so it certainly it's helping us on the growth front and we see that continuing and we love the differentiation that gives us, I don't know, you go and announced -- add, Chuck?
Charles Sykes -- President, Chief Executive Officer & Executive Director
No, I think -- and one of the things, the growth that we had in the healthcare space, a lot of that has to do with the way we were able to use the acquisition capabilities of ClearLink to really expand them with some new programs there. And we're still encouraged in the pipeline. We're seeing that momentum continue. So this is one example of how I think in the overall business will start presenting itself.
Vincent A. Colicchio -- Barrington Research -- Analyst
And then John, margins are back-end loaded. You just mentioned that utilization rates where they need to be to hit your targets. Just curious what other things maybe you may want to talk about that need to happen to achieve your margin expectations in that period?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, I mean as I said, I mean, everything need to happen that we forecast to happen, they are numbers. But I mean again, we're always, to a certain extend, back-end loaded, Vince. I mean, this year's, it's a little bit more but that's what you'd expect because we're going to go to significantly improve our utilization and we've got that G&A inflation in the first half of the year and we're really going to put it to work in the second half. But in 2018, our adjusted operating income, within 40% in the first half and 60% in the second half. So it's not that abnormal for us to see that and it's exactly -- I mean, if we continue to deliver on these new programs, if we ramp these programs as we intend to do, if the pipeline comes through as we see it, then we are very confident that we will get to those margins in the second half of the year, Vince.
Vincent A. Colicchio -- Barrington Research -- Analyst
Okay. We talked a little bit about the impact of automation. Just wondering if you could quantify or come close to it, the impact cannibalization had from automation in the quarter and maybe what's embedded in your guidance?
Charles Sykes -- President, Chief Executive Officer & Executive Director
Yeah, I mean I don't -- Vince, it's hard to try and give that answers specifically, the way that you're asking, it's a good question, our clients are -- in our guidance, they have already baked in what they think is going to be the impact to their volume forecast based on their digital initiatives. I will say then in general I think every client feels they can do easily 10%, most are trying to be what they think transformational, they get the 30%. I would say that the two big clients at least claim that they've achieved that have kind of reached the bottom of that plateau, in other words, I just don't know if there's going to be any more further reduction in their contact rates that they can achieve.
So the numbers that we're guiding to include all the impact of all that. The one thing that makes it a little difficult in all fairness is that some will say it's through digital automation but candidly, I don't know how much of it is digital automation versus just more of a softness in their business that they've had because we certainly see that too. And -- but the bigger thing for us is that we continue to see really good growth opportunities in other parts of the market and I don't really worry about the automation, the way that I used to think about it in the sense that's taking away opportunity, I really do see it more as creating opportunity for us and honestly, I think in today's world with the way labor supplies are going to continue to, I think get tighter particularly in these developed economies. We're going to need automation to continue to find productivity. And so I'm really encouraged that we've got that capability in our platform now that help these companies find that level of productivity they need.
So again, I think our issue is just more pronounced because if you go back and look to where communications as a vertical was almost 40% of our business. And then within that, we did have a very big client that's been very good to us and it's just that when that client started having some issues that did get quite pronounced in our business. So today, going forward, with no client more than 10% of our Company and starting to see growth coming from these other verticals that we really never highlighted that much in the past, that's a really good place for us to be, as a company and we just want to continue leveraging on that.
Vincent A. Colicchio -- Barrington Research -- Analyst
Okay. Thanks, gentlemen.
John Chapman -- Executive vice president, Chief Financial Officer
Thanks.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Yeah. Thank you.
Operator
(Operator Instructions) The next question comes from Frank Atkins with SunTrust. Please go ahead.
Frank Atkins -- SunTrust -- Analyst
Thank you for taking my questions. I wanted to ask a little bit about the mix of revenue growth by region. You had very strong performance in EMEA, how should we think about that growth outside the North America region going forward relative to kind of North America?
John Chapman -- Executive vice president, Chief Financial Officer
I would yeah -- again, we don't want to really guide by region, Frank. But I don't see the mix changing materially throughout the whole of 2019, I expect us to have robust growth across both the Americas and EMEA.
Frank Atkins -- SunTrust -- Analyst
Okay, that's helpful. And then wanted to see if I can get any additional color on that kind of communications vertical softness and how you consider that within your guidance?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, we'll still see the first half of the year, in Q4 we've seen AT&T was like (multiple speakers) so it's still material. We do see and we've always said, it's going to -- the level of reduction is going to reduce in the first half of '19, but it would still be a downward trend. We've also spoken again about we've won some nice new telco clients and what I would say Frank is we will start to see, I mean, again we don't want to guide by vertical, it's a dangerous game, but if I look at -- if I look at the second half of the year and especially Q4 and the benefit from largest client growth rate fundamentally stabilizing. We see telco being in the 4% to 6% growth rate by the time we get to Q4. So that's really encouraging and it's -- and it's growth rate, as Chuck mentioned, that in the right shore, it's in the right place that we believe we can win, both for the client and for Sykes in terms of achieving our required returns.
Frank Atkins -- SunTrust -- Analyst
Okay, that's helpful. And then I wanted to get a sense if we step back and look at kind of longer-term margin goals, now that we're kind of incorporating a couple of acquisitions, can you talk to me about just the trajectory of margin over the next couple of years and where you think you may be able to go?
John Chapman -- Executive vice president, Chief Financial Officer
Yeah, I mean, we've always said that when we made the acquisition of ClearLink, we saw, remember our stated goal was 4% to 6% revenue growth, 8% to 10% adjusted operating margin. ClearLink has and will, we believe help us achieve that. I know (inaudible) that could take us and beyond that. But the other small acquisitions, they're just too small to really move the needle in terms of (inaudible) in a stated range. I think, Frank, we'd be crazy to start talking about margins above the 8% to 10% range where we've been challenged to actually get in now the last couple of years.
So as I would say is we are absolutely focused that we improve our year-over-year margin, with guiding improvements for 2019. We still got way to go where we're solidly in that 8% to 10% range, but that is a desire to make no core -- less than 8% and overall for the year in the 8% to 10% range. So rather than getting ahead of ourselves, our guidance, we think is a nice and strong, we have showing some nice overall year-over-year margin improvement. And as and when we're in that range and solidly in that range, then I think we can start thinking about what (inaudible) can we talk about, I would say the 8% to 10%.
Frank Atkins -- SunTrust -- Analyst
Okay. And last one from me, can you talk a little bit about capital allocation and how you look at the M&A opportunities relative to buyback at this point?
John Chapman -- Executive vice president, Chief Financial Officer
We see ourselves still doing buybacks to get rid of the impact of (inaudible) and we are always looking at deals that can further strengthen the platform. If a transformational deal comes along, that we think is in the best interest of the Company in terms of financial synergies, et cetera, we will look at them, but I would say that they are few and far between but we are looking at continuing, looking at the platform and what we can do to further strengthen that. And again, that's one of the benefits of the new facility we've got in place and we've got flexibility there. We don't see CapEx being -- internal CapEx being a huge driver in the next 12 months and it will stay around that 3%. So, yes, -- so we are continuing, more of the same, so that you might get some small things coming through. But as we've seen for the facility, we've got ability to do more transformational deals if the opportunity arises.
Frank Atkins -- SunTrust -- Analyst
Okay, great. Thank you very much.
Charles Sykes -- President, Chief Executive Officer & Executive Director
Thank you, Frank.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chuck Sykes for any closing remarks.
Charles Sykes -- President, Chief Executive Officer & Executive Director
As always, thank you for your participation on today's call and we look forward to speaking with you guys next quarter. Everybody, have a good day. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 48 minutes
Call participants:Charles Sykes -- President, Chief Executive Officer & Executive Director
John Chapman -- Executive vice president, Chief Financial Officer
William Warmington -- Wells Fargo -- Analyst
David Koning -- Baird -- Analyst
Joshua Vogel -- Sidoti & Company -- Analyst
Vincent A. Colicchio -- Barrington Research -- Analyst
Frank Atkins -- SunTrust -- Analyst
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C&J Energy Services Inc (NYSE:CJ) has been assigned a consensus recommendation of “Hold” from the sixteen research firms that are covering the stock, MarketBeat.com reports. One investment analyst has rated the stock with a sell recommendation, eleven have assigned a hold recommendation and four have assigned a buy recommendation to the company. The average 1 year target price among analysts that have issued ratings on the stock in the last year is $20.90. 