SYKE Sykes Enterprises

Charles Sykes President, CEO & Executive Director
John Chapman EVP & CFO
David Koning Robert W. Baird & Co.
Vincent Colicchio Barrington Research Associates
Joshua Vogel Sidoti & Company
Call transcript

Hello, and welcome to Sykes Enterprises First Quarter 2021 Earnings Call. [Operator Instructions]. Please note, today's event is being recorded.

On the call today is the Sykes management team, including CEO, Chuck Sykes; CFO, John Chapman; and IR Head, Subhaash Kumar. Management has asked me to relate to you that certain statements made during the course of this call as related to the company's future business and financial performances 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 it relates to the company are intended to be forward looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward looking statements. Factors that can cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and in the company's Form 10-K and other filings with the SEC from time to time. I will now turn you over to Chuck Sykes. Mr. Sykes, Please go ahead.

Charles Sykes

Thank you, operator, and good morning, everyone, and thank you for joining us today to discuss Sykes Enterprises first quarter 2021 financial results. On today's call, I'll provide a high level overview of our operating results and John will walk you through the numbers and then we'll turn the call over for Q&A.

Our first quarter 2021 operating results were solid on a year-over-year basis, and I'm happy to say that our full year 2021 business outlook is now tracking above our initial guidance provided back in February as we continue to deliver for our clients. One year after the pandemic and the lockdowns began globally, we have proven and continue to prove our operational resilience while highlighting our strategic capabilities. These highly differentiated full life cycle capabilities span marketing sells, service and digital transformation.

Of course, none of the current success we were delivering in the face of COVID-19 would be possible were it not for the hard work and dedication of our employees worldwide. And we are not letting our guard down and we remain undeterred in our approach to the pandemic, which is to employ the latest safeguards for our employees while minimizing disruption to them and to their families that financially depend on them.

Turning to a quarter, from a revenue standpoint, this was the highest first quarter in the history of the company, even after excluding the Penny Hoarder acquisition. From a growth perspective, first quarter 2021 revenues were up 5.2% on an organic constant currency basis. A healthy demand mix between traditional and new economy market segments as well as existing and new clients split roughly 50-50 propelled our growth in the quarter.

As we continue to help our clients proactively adapt to secular trends driven by digital, which have been accelerated by the pandemic, it is driving a redesign of customer journeys across virtually every product and service category within enterprises.

All of this change is boosting demand for our value proposition, and we see the fruits of that in our financial performance.

Our deep domain expertise and work from home, for instance, which we acquired back in 2012, and is a core part of our strategic capabilities, is just one of the key differentiations that is resonating with our clients and openness to grow our share.

Within the traditional client segment, we are seeing the support opportunities from a broad spectrum of health care, financial services, technology and retail providers.

We are leveraging our success across our vertical market base to target known global brands and also brands that are national in scope that are either outsourcing for the first time or entering new markets or accelerating their outsourcing. At the same time, we continued the program ramps across the new economies segment. Categories such as fintech, e-retail, e-commerce and online food delivery that are similarly you see in solid growth in their existing markets and expanding into new geographic market.

On the operating margin front, we are equally proud of our achievement here. We saw expansion in our year-over-year non-GAAP operating margins to 8% from 7.2% in the prior year period.

If you strip out some of the noise in the quarter, our first quarter of 2021 non-GAAP operating margins were even better, reaching a decade high.

As we have said, we believe our operating margins have room for further expansion as clients gradually transitioned from a business continuity mode to a more steady state one, even as COVID lingers in the background. Based on our current client and geographic mix, it is our belief that most clients will have at least 30% of their delivery in the aggregate from home with the remaining 70% from brick and mortar facilities. Currently, that delivery mix is roughly inverse of those percentages. Even if with incremental IT investments and the potential for pricing trade-offs due to a changing delivery mix, we believe the resulting facility rationalization along with initiatives are underway to overhaul our operational value chain will provide a further boost margins in the coming years. And finally, we delivered solid non-GAAP earnings growth for the quarter, up to 65.9%. Cash flow from operations was also a first quarter record at $40.2 million. We closed the quarter with a net cash position which was even higher than the same period a year ago, even as we continue reinvesting in the business as we did with the acquisition of the Penny Hoarder and returned capital to shareholders through share repurchases.

So in closing, we were already off to a strong start with the first quarter results on the heels of a solid 2020. And the upward revision and our 2021 outlook further up the scores to business momentum we were capitalizing on.

While the pandemic is still with us and some countries are experiencing second waves, the vaccines, coupled with the lifting of the lockdowns, leaves us cautiously optimistic as we forge ahead.

While 2020 highlighted our resilience, it also gave us further conviction in the potential of our differentiated full life cycle value proposition in delivering results for our clients and unlocking value for our shareholders. With that, I would like to turn the call over to John Chapman. John?

John Chapman

Thank you, Chuck. I would now like to discuss our quarterly financial results, particularly key P&L cash flow and balance sheet highlights.

As Chuck mentioned, we continue to have record financial performance. In the quarter, we reported record revenues of $457.9 million versus $411.2 million last year, a growth of 11.4% in the quarter.

First quarter 2021 revenues were close to the top end of our revenue outlook range of $454 million to $459 million. On a year-over-year comparable basis, first quarter 2021 revenues included a $13.9 million revenue contribution from the Penny Hoarder acquisition and an $11.5 million foreign exchange benefit.

Excluding the acquisition in foreign exchange benefit, first quarter revenues were up approximately $21.3 million or 5.2% constant currency organic revenue growth, thanks to our agility and our diverse business mix. By vertical market and an organic constant basis, health care was up around 51%; others, which includes retail up 22% technology, technology up around 10%, financial services up approximately 6%, all of which more than offset 33% decline in travel and transportation and 7% decline in communications vertical. The tougher comps in the communications vertical expects to lot in the third quarter of 2021.

First quarter 2021 operating income increased 29.3% to 31.5 million, with operating margins increasing to 6.9% from 5.9% for the comparable period last year. On a non-GAAP basis, which excludes the impact of impairment of right of use assets and other fixed assets related to COVID-19 driven facility exits, acquisition related intangible amortization, merger and integration costs and other costs related facility access.

First quarter 2021 operating margin was 8% versus 7.2% in the same period last year. The increase in the comparable operating margin was due to strong overall demand, higher capacity utilization and cost benefits of COVID-19 related facilities rationalization, partially moderated by approximately 60 basis points of impact from a true-up in long-term incentive comp as well as client ramp costs and IT and IT-related investments to reinforce the company's infrastructure and agility in the marketplace. The year ago operating margin was also moderated by approximately net 70 basis points impact from COVID-19 related lockdowns, including government mandated wage payments to unavailable absent employees without the corresponding revenues, cost of temporary workspace accommodations, employee transportation and facility sanitization costs.

First quarter 2021 diluted earnings per share increased 85.3% to $0.63 versus $0.34 in the same period last year. On a non-GAAP basis, the first quarter 2021 diluted earnings per share was $0.73 cents versus $0.44 cents, up 65.9% on a comparable basis. The increase was driven by a combination of factors, including strong operating performance, lower other expenses, contributions from the Penny Hoarder acquisition, lower effective tax rate and lower share count.

First quarter 2021 non-GAAP diluted earnings per share exceeded the midpoint of the $0.67 to $0.70 guidance range by $0.04 per share, which was driven by a lower-than-projected tax rate.

Turning to our client mix, on a consolidated basis, our top 10 clients represented approximately 40% of total revenues during the first quarter of 2021, down from 45% in the year ago period. The decline of function of both broad-based growth outside of our top 10 clients and the contribution of the Penny Hoarder acquisition.

In fact, we had no 10% client in both comparable quarters.

Now let me turn to select cash flow and balance sheet items.

During the quarter, cash flow from operations jumped 41.1% to $40.2 million from $28.5 million due to a combination of strong earnings and working capital swing factors. Capital expenditures decreased to 2.1% of revenues from 2.9% of revenues in the year ago period. The decrease was largely timing driven. The company continues to invest in PC refresh, IT security and targeted capacity expansion. Trade DSO on a consolidated basis for the first quarter were 80 days, unchanged comparably and down 1 day sequentially. The DSO was 80 days for Americas, 82 days for EMEA.

Our balance sheet at 31st of March remains strong with cash and cash equivalent of $112.8 million, of which approximately $87.2 million or $98.3 million was held in international operations. At the quarter end, we had $48 million in borrowings outstanding, down from $63 million at the year end, under our 500 million credit facility.

We continue to hedge some of the foreign exchange exposure for the second quarter and full year was hedged approximately 35% and 6% at a weighted average rate of PHP48.78 and PHP48.98 to the U.S. dollar.

In addition, our Costa Rica colón exposure for the second quarter and full year is hedged at approximately 37% and 28%, at weighted average rates of CRC 584.72 and CRC 586.43 to the U.S. dollar.

Now let's turn to some seat count and capacity utilization metrics. On a consolidated basis, we ended first quarter with approximately 45,100 seats, down approximately 3,500 seats comparably. The reduction in capacity reflects decisions made by certain clients to permanently alter the delivery mix away from brick-and-mortar to a home agent solution due to COVID-19, coupled with consolidation of underutilized facilities.

The first quarter seat count can be further broken down to 7,600 in Americas and 7,500 in EMEA region, from 40,600 and 8,000, respectively in year ago quarter. Capacity utilization rates at the end of the first quarter of 2021 were 74% for the Americas and 71% for the EMEA region versus 74% for Americas and 69% for EMEA in year ago quarter. The capacity utilization rate on a combined and comparable basis increased to 74% from 73% year ago period. Including permanent home agent and the comparable utilization calculation would have increased the comparable capacity utilization even further.

Now let's turn to business items.

We are increasing a full year 2020 revenue and diluted earnings per share outlook relative to the initial guidance provided back in February 2021. The increase in the revenue outlook is driven by a broad base of existing clients across the company's vertical markets while the increase in diluted earnings per share is primarily due to a lower-than-projected tax rate.

Second, we continue to work with clients in determining future view of the delivery strategy between home agent and brick-and-mortar facilities driven by COVID-19.

As such, we continue to adjust their capacity footprint similar to actions taken in facility leases in 2020 as we get greater clarity around those decisions.

Third, our revenues and earnings per share assumptions for the second quarter and full year are based on foreign exchange rates as of April 2021. Therefore, the continued volatility in foreign exchange rates between the U.S. dollar and the functional currencies of the markets we serve could further impact positive or negative on revenues on both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter and full year. Fourth, we anticipate total other interest income expense net of approximately $1.4 million and $4.8 million for the second quarter and full year, respectively. In the second quarter, roughly $1 million of the $1.4 million reflects the previously discussed impact of the company's stake in XSELL technologies, which is poised to accelerate its growth investments in its business and is a candidate under the equity method. The remainder reflects the interest expense related to the acquisition of the Penny Hoarder. The amount and the other interest income expense net, however, exclude the potential impact of any foreign exchange gains or losses.

Finally, we expect a full year 2021 effective tax rate to be lower than previously projected due to discrete benefits relating to the Philippines tax reform as well as stock compensation. Considering the above factors, we anticipate the following financial results for the 3 months ending June 30, 2021. Revenues in the range of $443 million to $448 million, effective tax rate of approximately 23% on both GAAP and non-GAAP basis, fully diluted shared count of approximately 39.9 million, diluted earnings per share of approximately $0.46 to $0.50, non-GAAP diluted earnings per share in the range of $0.56 to $0.60 and capital expenditures in the range of $15 million to $20 million.

For the 12 months ending December 31, 2021, we anticipate the following financial results. Revenues in the range of $1.843 billion to $1.858 billion, effective tax rate of approximately 21% and 22% on a non-GAAP basis, fully diluted shared count of approximately 40.1 million, diluted earnings per share of approximately $2.67 to $2.77, non-GAAP diluted earnings per share in the range of $3.02 to $3.12, capital expenditures in the range of $47 million to $53 million. With that, I'd like to open the call up for questions. Operator?


[Operator Instructions]. And the first question comes from David Koning with Baird.

David Koning

Congrats on another good quarter.

Charles Sykes

Thanks, Dave.

John Chapman

Thanks, Dave.

David Koning

Yes. And I guess maybe first of all, it seems like the selling environment is pretty good. And I think Q2, I think you're guiding to something like flat organically. It seems like just given, more than anything the comp in the year ago. Maybe you can talk a little bit about that.

I think you had some extra COVID-related type items a year ago. But then really is the sales pipeline now that it's strong, it's driving accelerating growth in the second half, but is it really 2022 that you're setting up the kind of return back to a full year of pretty normalized revenue growth and maybe even better than that? Maybe how do we translate the sales momentum into when that really hits the revenue?

Unidentified Company Representative

Yes, you're right, David.

In terms of Q2, we do have some year-over-year headwinds. We speak about the travel vertical. And if you remember last year, we spoke about how travel really held up last Q2, but this year we've really got a headwind.

And so if you look at our guidance, you're right, our organic constant currency growth this year is going to be below a kind of 4% to 6% target. And a lot of that is down to 2 things. It's the headwind from the travel. And we're not really forecasting that's going to come back.

I think if you look at Q4, we probably got some year-over-year growth there starting to travel and we still got the telco, a little bit of headwind until Q3 there.

I think the numbers you've got there in terms of organic constant currency for the year is probably spot on. And I think as we get into Q3 and especially Q4 with the travel, we start to see that we'll be in a 4% to 6% range again, and that's still our target for future years. We love the fact that we've no longer this large client over us. We love the fact we have no client over 10%. We've got broad-based growth.

So other than those kind of headwinds, we're still really positive about the sales pipeline. We've got nice high-growth companies are giving us nice volume increases. Pretty much the same as we spoke to you two months ago, Dave, I think we're pretty much in the same position as we thought we would be 2 months ago.

David Koning

And Chuck made some comments just about facility rationalization, some other types of costs reductions may be in, and you talked about a further boost to margin, maybe putting some numbers around that. Is that just to kind of get you to the range that you've talked about in the past towards, whatever, I can't remember, 8.5% to 10.5% or whatever or when you say a further boost, you mean there's ways that it potentially could even go above that over a period of time?

John Chapman


Our guidance this year pretty much still assumes, like I think we said last quarter, we spoke about how our forecast pretty much said we were going to keep the same facilities that we've got today and that's still the case.

We are not projecting that we'll have the decisions that we need to then make permanent reductions to the facilities' costs to help them boost their margins. And again, we've always said in theory, yes, it should improve the bottom, the total margins. Where we really like it is obviously the more that goes out home, the less facilities costs, less fixed costs you've got. We do believe that instead of simply thinking about increasing the top end of our 8% to 10% range, we definitely think it limits the bottom end of the 8% to 10% range, but we're still waiting on permanent decisions from clients to take action on those facilities. But it's not just about the cost aspect. It's about the labor market aspect.

We are clearly, if we are more virtual, especially in the domestic markets, then we fundamentally believe that access to labor is also going to be a tailwind for us as and when we get clients making those decisions. But as we sit here today, we're probably in the same position as 2 months ago where the forecast really reflects the facilities we've got today, even while when you look at our utilization, because we've got most of our people still at home, they're only 25% to 30% utilized.

So yes, I think you're right, David, we will benefit from that. Exactly when and how is still unclear, and I would say that our guidance for the year really assumes where we're not really going to benefit from that until 2022.

David Koning


Okay. Thanks. And just one real quick one. The Penny Hoarder, how fast is that just growing on its own, its own organic growth in Q1 and how are you thinking of that longer term?

John Chapman

I don't actually have that, but it pretty much hit what we thought in Q1, David. I know we gave $15 million number and it came in closer to $14 million, but that was just a number to help you guys understand the impact on the organic.

For the year, they're still going to be in the range. Their annual guidance hasn't changed and year-over-year it's about 20%, 25% growth they've had if I looked at their numbers before they came in our number.

So they're probably going at the 20%, 25% number.


And our next question comes from Vincent Colicchio with Barrington.

Vincent Colicchio

Yes. A nice quarter, guys. Chuck or John, I'm curious, what portion of revenue guidance includes a short-term revenue related to the pandemic?

John Chapman

In terms of programs that we've got simply because of the pandemic, it's basically nothing now. Clearly there's clients that are doing better because of the pandemic, some are doing worse. But overall, Vince, we don't have any temporary specific COVID programs of any note to tell you about it, I'm afraid.

Vincent Colicchio

And that would be the same for the quarter, I assume. Is that right?

John Chapman

Yes, yes, yes.

Vincent Colicchio

And given all the money coming out of Washington, how difficult is it to hire people and how concerned are you to hire people in the U.S.?

Charles Sykes

Yes, I would say the U.S is probably our single biggest headwind that we're facing right now.

Just to put it in perspective, last year, this time when we were in Q2, we saw the biggest drop in attrition and absenteeism. And as soon as the unemployment benefits kicked in, it all reversed right back to normal.

So right now we're having a very tough time in the U.S. But we do anticipate that when the unemployment benefits stop, we think that's going to help us tremendously. And it's pretty specific in the U.S.


And our next question comes from Joshua Vogel with Sidoti & Company.

Joshua Vogel

My first question, and I may have missed it in your early prepared remarks, Chuck, but when one of your peers is noting that they're seeing a tremendous market opportunity emerging as a lot of large enterprises are taking their captive operation and looking to outsource because they don't have the capability or personnel in place to redesign those customer journey functions in-house anymore.

So can you just talk a little bit about what you're seeing in the marketplace and amongst your clients?

Charles Sykes

I think it's an accurate statement. I don't know if it was so much just because of customer journey redesign. What I'm seeing is companies are really wanting to build resilience into their model and outsourcing is definitely giving them that flexibility. At the same time, I think it's safe to say that many of them are looking at how to implement self-service.

And so the logic is why would you invest in brick-and-mortar facilities if at the same time you're trying to digitize your offerings.

So right now I would just say in general the people are embracing outsourcing in a pretty significant way.

So I would agree with the comments that we're seeing a lot of companies wanting to lose their facilities to an outsourcer, but I would say [indiscernible] resiliency.

Joshua Vogel

I got you. And just thinking about the marketplace and your pipeline today and your guidance, what does that -- assume it's coming from new client win versus expansion within the existing base?

John Chapman

It's no different from historic. I mean the vast majority of our growth comes from us expanding and developing our existing client base. And there's really not been a change in that Josh.

I think we've spoken about us in the past, where we retooled our sales team to go out and win brand new logos, and that's still the same. We're seeing a lot of really nice logos. But if you look at their contribution to the overall revenue number, it really is unchanged in the short term. But what -- if I look at why we've been growing solidly in the last, well, really getting close to 18 months now and when you take out a lot of the previous largest client, it's really because of the success of those that eventually that those clients have got significant growth that helps us in the top line. But for this year it's solid pipeline, but vast majority is about executing for your existing clients and getting growth in that space, especially when those clients are looking to outsource more.

So again, we all know that most of our clients got multiple outsourcers.

And so if you are executing and at the top of the ladder in terms of performance, you get the opportunity to win more of that business, and that's where we want to be. And that's the part that progress we see.

Charles Sykes

Yes, and Josh when you think about it these large fortune 500 companies, it's not that difficult for them to give you 1,000 seats. And yet on the other hand, the new economy clients that were winning on average we're probably looking at 100 seats when they get started.

So it takes 10 of those to equal one bad one. And I think that's why the fortune 500 will always be a large percent of our growth from the standpoint of revenue.

However, the thing that we love is that these new economy clients typically in the second year, that revenue is about 2.5x what the first year is, and by the third year, it's typically 4x to 5x. That revenue -- so we know that we keep bringing it on that 10:1 ratio. I mean it just sustains our growth in the future. That's the key.

You just don't want to be growing your business around 1 or 2 clients. We've experienced that in our past before and it feels good when you're growing, but if it ever turns, it's not too pleasant.

Joshua Vogel

Shifting gears, really strong performance in EMEA, certainly in the last 2 quarters. And I was just curious what's driving that? Is there a structural shift in demand there that can drive outsize longer-term growth or is it a different approach to the way you're selling over there? Can you just give some thoughts on that?

Charles Sykes

Well, I would say in Europe, the biggest thing that we're benefiting from right now is a work from home platform because -- so when you think about it, in the past you can't really offshore a lot of Scandinavian languages. German is not too easy to offshore. But now with our work from home location, we can hire in the source people from all over the continent.

So it's really helping us to be able to capture the growth that we're winning. And we have right now in Europe 77% of our workforce is working from home.

So I feel like that's probably helping us in a pretty big way.

Joshua Vogel

Okay, great. And just one last one for me.

Just thoughts on how you feel about your digital portfolio today and whether you have the capabilities and offerings in place to address a potential client's needs that you see in the pipeline today?

Charles Sykes

I would say we're feeling real good about that. The one thing about these smaller companies that I think our value proposition resonates with them is that they're not just looking to us to help serve their customers, they also can look to us to help us grow their business.

So with our digital marketing ourselves and service capability, we're really in a position to help them at a critical time in their company to grow and capture and serve that demand. And candidly, up until probably the last 3 years, I would say we weren't as putting as much focus on that sector. We were mainly kind of into Fortune 1000.

So I feel very good about the success that we're having right now.

Joshua Vogel

Sounds great. Well, thank you for all the insights and certainly impressive results and good luck over the balance of the year.

John Chapman

Thanks, Josh.

Charles Sykes

Thanks, Josh.


And we have a follow-up from David Koning from Baird.

David Koning

Yes, just one follow-up. I noticed you guys have had really good gross margin progression for -- I think it's something like 10 quarters in a row where gross margins are up year-over-year and this is the -- so this is the first time they're not down that much.

I think they're down 50 basis points year-over-year. And your operating margins obviously continued to be really, really good, but your gross margin was down a little year-over-year, yes, for the first time in a while.

Just wondering what's driving that and will that kind of influx back?

John Chapman


I think there's a couple of things to watch, David, because we always say we don't like to guide gross margin because if you look at the difference in Europe and the U.S. and nearshore and offshore, there is a bit of that in there, David. But I think the rest of it is really about the challenges that Chuck spoke about in the U.S., If I looked at across the board, that's the year-over-year, that's the really biggest impact. There's a lot of the stimulus checks and the challenges we had in Q1 in the U.S. they are billing of those numbers and they were the main reason why, if you look year over year, you saw a little dip in and the gross margin. Plus remember, as Europe gets slightly bigger as a proportion of our business, that also can adjust the number. But yes, if I look in terms of where we think we've got opportunity as it's the U.S. and we think we'll get that as the stimulus and the unemployment starts to unwind that will get those people back to work and get the attrition, the absenteeism down again.


And that concludes both the question-and-answer session as well as the call. Thank you so much for attending today's presentation.

You may now disconnect your lines.